After their recent decline, oil prices should level off on the back of a rebalancing of supply and demand.
Gold prices will come under pressure if Fed rate hikes drive US real yields a little higher.
"We still see oil prices around $55 in a year."
Oil prices are back at their highest level since Q2 2015, above $55 per barrel. The recent rally is due to: 1. Gulf Coast activity has been slow to recover from hurricane Harvey. 2. Expectations for an extension to the supply cut deal when the Organisation of the Petroleum-Exporting Countries (OPEC) meets on 30 November. 3. Growing tensions between the Iraqi government and Kurdistan, the semi-autonomous region which voted for independence. According to the International Energy Agency, Iraq’s oil reserves are the world’s fifth-largest, with 17% in the Kurdistan region. Turkey’s threat to restrict Kurdish exports could also disrupt oil supply. 4. Stronger-than-expected global growth in Q2 2017, especially in the eurozone and Asia.
This stronger economic activity has encouraged OPEC to raise its 2017 and 2018 growth forecasts for oil demand. Demand could even exceed supply this year if production caps are maintained.
However, there are downside risks: 1. US shale oil producers could continue to ramp up output. 2. The US ban on crude exports has been rescinded. 3. Only three of the 11 signatories of the OPEC deal have met their production cut targets so far.
All in all, we still target $55 in both 6 and 12 months.
"Growth optimism and a hawkish Fed have left gold on a rollercoaster."
This summer, gold rallied following tough talk between North Korea and the rest of the world. However, the impact was short-lived and bullion soon headed back south.
In August, the US Federal Reserve’s announcement of a reduction in its balance sheet, starting in late 2017, drove the dollar higher and sent gold prices down, given the negative correlation between the two.
Looking back at previous Fed rate hikes, we see a pattern emerge – investors tend to buy dollars following the decision, sending gold down temporarily, but the initial losses often prove short-lived as gold buyers emerge.
After Indian gold imports rose sharply in the first half of this year ahead of the introduction of the nationwide goods and services tax in July, we expect demand from the world’s second gold importer to weaken in H2, helping keep price rises in check.
Gold still has a place in portfolios for diversification purposes given its low correlation to other asset classes.
We still target $1,225 in 6 months and $1,200 in a year.
Sources: SGPB, Datastream, data as of Q42017. Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.