The Organization of the Petroleum Exporting Countries (OPEC+) is an intergovernmental group of 23 oil-exporting nations that regularly gather to decide how much oil to export and sell on the world market. OPEC+ collectively influences the global oil market to maximize profits, and seeing as though oil impacts nearly every other market sector, this organization single-handedly affects the global economy. Recent announcements from OPEC+ sent shockwaves around the globe as the major oil exporters reported upcoming oil cuts, leading many nations to panic purchase while they still can.
The cuts will begin in May, reducing crude oil exports by over 1 million barrels a day. As a result, we can expect to see major increases in oil prices around the globe. While this may be bad news for many investment sectors, it edged gold prices above the $2,000-per-ounce line yet again as investors find another reason not to trust the economy.
As we progress through 2023, the hits seem never ending. January brought extreme inflation levels that led to the Federal Reserve hiking interest levels at an aggressive rate. The tactic brought no substantial results, causing inflation to continue soaring with the high interest rates throughout February.
Come early March, this overcorrection led to the largest U.S. commercial bank collapses since the 2008 Great Recession, sending shockwaves throughout the United States financial market and numerous global banking institutions. Just days later, one of the most prominent banking institutions in the world and one of the most powerful in Europe nearly failed after losing 30% of its shares. Both of these events led to a domino effect sparking the beginning of a banking crisis.
At the same time, the U.S. dollar only continues weakening, and now OPEC+ announced this shocking oil export cut plan which will skyrocket oil prices on a global level. As the economy spirals downward, gold becomes the one stable life ring amid the chaos. Investors want an asset that won’t continue losing value like the U.S. dollar, and gold is the answer.
Many traders have realized that “in the end, nothing good can happen if oil prices continue to rise,” according to Edward Moya, a senior market analyst at OANDA. “Demand for safe havens appears to be elevated and that should be good news for gold.”
The ICE U.S. Dollar Index is currently down 0.48% while oil futures continue to maintain a negative 19% trend over the last 12 months.
“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, the director of research at Insignia Consultants, explains.
“A daily close over $2,000 today and tomorrow will cause a short covering rally and a move to $2,120. Momentum and sentiment is very bullish. Only a very strong March jobs numbers will cause a sell off in gold. Incoming news will be the key before the Easter Vacation,” Karnani continues.
While gold traditionally struggles during periods with high interest rates, the most recent hike from the Federal Reserve is no match to the news from OPEC+. The shocking decision is “really driving that inflation hedge trade for gold,” Moya explains.
Another factor pushing gold prices in the positive direction is the current poor U.S. manufacturing activity rates reaching a three-year low in March following the constant credit-tightening.
With all factors considered, many predict substantial gold performance levels throughout May following the onset of the oil export tightening and continued inflation. While additional interest rate hikes could slow gold’s traction, most only see slight, temporary dips. Gold’s demand comes from numerous, multi-faceted sources beyond investors, allowing it to maintain its steady, safe-haven status.
Gold started 2023 in the low-to-mid $1800-per-ounce price range with most analysts expecting it to stay within the upper $1,800 range by the end of the year. Within the first quarter, the shiny precious metal has already exceeded expectations by outperforming all of last year’s price levels, aside the first quarter of 2022. If gold continues at this rate, we could easily see enormous jumps above the initial expectations.
Gold typically performs best as a long-term investment strategy to hedge against inflation and protect purchase power, though the last few weeks have shown how short-term success anomalies can occur as well. Gold’s primary benefit is how it can succeed while other asset classes fail. As always, investors should consult their financial advisors before making any portfolio decisions.