Gold - Higher oil prices a boon or curse?
- Higher oil prices both boon and curse for gold.
- Oil rally could boost inflation (good for gold), but
- Could also force central banks to quicken policy tightening (negative for gold).
Brent oil hit $70 a barrel for the first time since December 2014. Will it have a positive impact on gold?
As per textbook rules, oil price rally boosts inflation expectations, thus leading to higher demand for gold (inflation hedge).
However, a sharp rise in oil could also force the central banks to quicken the pace of policy tightening. Central banks with NIRP (negative interest policy) like the ECB and BOJ risk falling behind the curve and hence may tighten the screws sooner than later.
This may hurt the zero-yielding safe-haven metal. Also, oil rally usually keeps the risk assets (equities) well bid, thus keeping investors away from gold.
Both oil and gold have rallied sharply since mid-December. As of writing, gold (XAU/USD) is trading at $1325 levels and Brent oil is hovering at $69 levels. The outlook for gold depends on how the major central banks react to rising inflation expectations due to higher oil prices.
Gold Technical Levels
A move above $1327.78 (Jan. 10 high) would open up upside towards $1337.34 (November 2016 high) and $1357.55 (September 2017 high). On the downside, breach of support at $1322 (session low) would expose $1318.60 (10-day MA) and $1315.60 (1-hour 200-MA).
Author
Omkar Godbole
FXStreet Contributor
Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.
