With gold trading around $2,000 a barrel and oil in the mid seventy dollar range, moves to $3,000 an ounce and $100 a barrel in the next year or so respectively would be quite something. They each dance to their own drummer in regard to macroeconomic effects upon their price, but do have drivers in common that could make this price rise obtainable. According to Aakash Doshi, Citi’s North America head of commodities research, there are several catalysts that could bring this scenario to fruition.
Let’s take a look at gold first. The most common scenario to drive prices higher isn’t likely to be jewelry consumption, which is the number one component in moving gold prices. It is more probable that pressure will come from increased demand from central banks around the world. So what would make central banks effectively double their purchases of gold? We’ve talked about it before. De-dollarization. Especially in emerging markets, where faith in the U.S. dollar could take a hit, thus propelling these sovereignties into gold. Remember, De-dollarization refers to a process where countries reduce their reliance on the U.S. dollar as the chief reserve currency. The dollar has long been the primary global reserve currency, used by central banks for storing value and conducting international business. However, its dominance has faced challenges over the years.
China and Russia are the leading purchases of gold, followed by India, Turkey, and Brazil, also increasing bullion buying. From a demand side, the world’s central banks have sustained two successive years of more than 1,000 tons of net gold purchases, according to the World Gold Council report in January. If this trend continues into 2024 it would bode well for much higher gold prices.
Other than de-dollarization, inflation has been the likely driver of central banks and their purchase of gold. Gold is used by central bankers to preserve the value of their reserves against inflation or currency depreciation. Macroeconomic uncertainty and the fear of recession all make gold a more desirable asset class. We have been in a massive monetary tightening policy the last year and a half as a fallout from record high inflation. A global recession of any nature will spur just the opposite, a need to lower interest rates to spur growth and production. Citi’s Doshi goes on to state that in such a scenario the Fed will cut rates rapidly, noting “That means the brakes have been cut, not to 3%, but to 1% or lower – that will take us to $3,000.” While such a scenario is a bit extreme, it shows what can happen when markets get pushed to their limits.
Albeit gold would have to increase by some fifty percent to achieve a target of $3,000 an ounce, oil on the other hand at roughly $75 a barrel would not take a herculean move to hit $100. So what’s behind the targeted 25 percent increase in price? Again, according to Citi, the catalysts for oil to hit $100 per barrel include higher geopolitical risks, deeper OPEC+ cuts and supply disruptions from key oil producing regions. The geopolitical risk is probably most prevalent. The ongoing Israel-Hamas war has not hit oil production or exports yet, with the only significant impact being the Houthi attacks from Yemen on oil tankers and other ships traversing the Red Sea. This has impacted Iraq, a major regional producer, and anything that would cause a disruption in supply would certainly put pressure on prices to go higher.
The price of oil going forward is really all about political tensions and stability. Iraq, Iran, Libya, Nigeria and Venezuela are all vulnerable to supply disruptions, with steeper U.S. sanctions policy on Iran and Venezuela potentially on the table. Russia could also play a factor in driving prices higher, especially if its production is targeted by Ukraine.
A macroeconomic driver of oil as well as gold is Fed policy. With the Fed signaling rate increases have likely ceased, with a first cut now generally expected in June rather than in March or May. Lower interest rates typically stimulate economic growth, which fuels crude oil demand. Oil prices will likely be dictated this year by the geopolitical events mentioned as well as whether the U.S. and/or the world slip into recession. Most analysts believe if these scenarios don’t transpire, oil prices will remain range bound roughly where we are currently. As such, oversupply, weak prices, and moderate demand growth are expected to be the catalyst for prices this year, barring major supply disruptions like the situation in the Red Sea. According to the consulting firm Deloitte, “That is the good news here. We are all consumers in some form or fashion, and these softer prices will help heat our homes and fill our vehicles.” While $3,000 an ounce gold an $100 a barrel oil aren’t probable, circumstances dictate that one must not discount them either.
