OPEC deal may aid gold – HSBC

James Steel, Chief Precious Metals Analyst at HSBC, suggests that oil and gold tend to be positively correlated and while the two generally move in sync the relationship is stronger at some times than at others.

Key Quotes

“Reports of an OPEC agreement to limit oil output, if it drives oil up further in the coming days, may have a more marked impact on gold. OPEC came to its first production cut agreement since 2008. The oil producer cartel will limit output at 32.5m bpd, a decline of some 5% or 750,000bps from current levels. The exact size of the cut or how the reduction will be implemented is not clear.

If the agreement is as important as the financial media are reporting, then we believe gold may be impacted. Further oil price rallies may feed more convincingly into the gold market, especially if other non-oil commodities also rally, and the broader commodity indices, such as the GSCI, rise. This could help stabilize gold prices which have clearly been on the defensive recently.

Official sector purchases are an important component of gold demand. A key source of official sector gold demand is the Russian central bank. The bank’s First Deputy Governor Dmitry Tulin said the central bank is ready to keep buying gold from banks to increase gold's share in its reserves; but that the bank has no quotas or objective. He reported the bank is currently selling foreign currency from reserves and will keep buying gold, but they do not have an operational target of increasing gold's share in reserves to an agreed on level. An official at the central bank statistics department and reported on Reuters, said separately that the bank will buy about 200t of gold this year to bolster its reserves, after purchasing 206t in 2015. This is a little less half of HSBC’s forecast of total central bank demand this year. Purchases of that magnitude likely will contribute to setting a floor on the market.

The gold market will absorb another raft of US, European and Japanese economic data on Thursday. We think prices may stay on the defensive in the absence of new developments, unless oil prices continue to rise enough to lend support to bullion.”