The announcement of surprise cuts from OPEC+ in crude oil production sent shockwaves throughout the global economy, affecting numerous market sectors, including gold. Closely following the news, gold prices quickly gained more traction as crude oil became more expensive as well. OPEC+ plans to cut production by over 1 million barrels a day beginning in May, though Nymex crude oil prices already spiked by $3.94 immediately following the announcement to $79.60, giving rise to gold’s performance.
April gold increased by $9.20 at the same time to $1,978. News of more expensive oil is detrimental in numerous market segments. Oil prices impact how the global economy runs, so when exports tighten and prices increase, investors notice the red flags, and run toward the safer investment class to protect their finances.
“It’s a shock move by OPEC+ as the cartel had previously vowed to maintain a steady supply. This is a significant reduction in a market in which supply was expected to be tight for the second half of 2023,” Nigel Green, the CEO of the deVere Group, explains. “The production cuts could see prices close to $100 a barrel due to demand from a reopening China and as Russia has slashed production due to sanctions from the West. The dramatic cut will only add to pressing global inflationary squeezes.”
Analysts predict the OPEC+ oil cuts could worsen the current inflation environment. If inflation continues spiking in the coming months, central banks will likely further their interest rate hikes as an attempt to control the situation, though given past events, the efforts may not pan out. We may become stuck in another cycle of extremely high interest and inflation rates that cannot combat each other.
The Organization of the Petroleum Exporting Countries (OPEC+) includes the top 23 oil exporting countries around the globe that single-handily control the world’s oil access. The intergovernmental group gathers regularly to agree on export figures to maximize profits, though typically, the announcement doesn’t come at such a shock as April’s did.
While the announcement may be bad news for numerous market sectors, it marks a rise in gold prices. In early April following this news, gold finally maintained its performance level above the $2,000-per-ounce line and has mostly managed to do so since. On April 13, prices hit a high of $2,055 per ounce.
Investors have realized that “in the end, nothing good can happen if oil prices continue to rise,” Edward Moya, a senior market analyst at OANDA, explains. “Demand for safe havens appears to be elevated and that should be good news for gold.”
Very few assets rise during poor economic periods and gold is one of them. 2023 is not the year of stability, and the one trend we can rely on is economic letdowns. As we progress through each month, more hits keep coming with high inflation rates, banking failures and fears, poor job report figures, and these oil cut announcements, just to name a few.
The one stable asset amid this chaos has been gold. As all other market sectors fall subject to the high inflation rates and failing economy, gold only continues rising. The shiny precious metal started the year at $1,846 per ounce and just breached $2,055 per ounce a few days ago, displaying a $209 rise.
Oil futures have continued a negative 19% trend over the last year while the U.S. dollar remains down. “Inflation fears have started to rise after OPEC+ decided to cut production. There are buyers on dips. A weaker U.S. dollar today and the rise from the day’s low added to the price rise,” Chintan Karnani, Insignia Consultants’ director of research, explains.
The oil cuts haven’t officially begun yet, though we’re already seeing the ramifications. As we near May, we can expect to see even greater ripples throughout the economy. Inflation may worsen, allowing gold to rise even higher, though interest rates may spike in response.
“There’s been a notable flight to quality bid across classic safe havens like gold and U.S. Treasuries,” Nicky Shiels, MKS PAMP’s head of metal strategy, explains. “Gold has surged through $2000/oz, from only $1800/oz. We continue to think the SVB failure is a new catalyst and a game-changer for gold as it officially confirms that the Fed has broken something more important and closer to home.”
Numerous factors allowed gold to finally breach the $2,000-per-ounce line, including the oil cuts and SVB failure. As always, investors should consult their financial advisors before making any portfolio decisions.