(Kitco News) – The gold market is seeing renewed selling as rising inflation pressure from higher oil prices continues to support the Federal Reserve’s hawkish monetary policy bias, boosting the U.S. dollar and pushing bond yields higher.
Oil prices surged higher Monday after OPEC+ members Saudi Arabia and Russia announced that they would maintain their oil production cuts for another three months, through to the end of the year. Saudi Arabia will continue to hold back production by one million barrels per day, while Russia will continue to reduce its output by 300,000 barrels per day.
Saudi Arabia said that the voluntary supply cuts are aimed at supporting stability and balance in oil markets. The ongoing production cuts have pushed oil prices to a 10-month high. West Texas Intermediate (WTI) crude oil prices continue to hold on to most of their early morning gains, last trading at $86.67 per barrel, up 1.27% on the day. At the same time, Brent Crude, which reflects more international oil demand, was trading at $89.20 per barrel, up 1.5% on the day.
“Oil prices have rallied as traders have gotten the message loud and clear that OPEC+ is not in the mood to ease supply anytime soon,” said Naeem Aslam, chief investment officer at Zaya Capital Markets. “The fact that Saudi Arabia has extended the voluntary cut shows that OPEC+ members are very comfortable keeping prices high for a longer period, and they have no interest in what central banks are worried about.”
Traditionally, higher oil prices would be bullish for gold because it is inflationary; however, many analysts note that in the near term, the oil market is creating further headwinds for the precious metal.
Ole Hansen, head of commodity strategy at Saxo Bank, said that higher oil prices are feeding into inflation fears, which could force the Federal Reserve to maintain its hawkish bias and keep interest rates higher for longer.
Hansen pointed out that the U.S. dollar index has pushed back above 104 points, trading at a six-month high. At the same time, bond yields are holding near last week’s 15-year highs.
Hansen noted that oil prices are now positive for the year and if prices remain elevated, it will create adverse base effects for headline annual inflation.
However, Hansen added that OPEC also walks a fine line as elevated interest rates add to the risk of the global economy falling into a recession, which would significantly dampen oil demand.
“In the short term, the market is going to struggle as it continues to digest OPEC’s latest move,” said Hansen. “But looking at the long-term outlook, we still see weaker economic growth and persistently elevated inflation and that continues to support underlying demand for gold.”
Not only is the U.S. dollar index’s push back above 104 hurting gold, but analysts note that some investors are frustrated that the precious metal didn’t have enough bullish momentum to break critical resistance above $1,980 an ounce last week.
“Despite the choppy price action witnessed last Friday following the mixed US jobs report, gold seems to be searching for a fresh fundamental catalyst to trigger its next significant move,” said Lukman Otunuga, senior market analyst at FXTM. “In the meantime, the precious metal is showing signs of exhaustion on the daily charts, with weakness below the 50-day SMA opening a path back toward $1920. Should the $1935 level prove to be reliable support, prices could retest the 100-day SMA around $1953.”
