Since the turn of the year, the price of gold has risen by around 18%. As a result, many investors are highly optimistic about the prospects for the precious metal and it has clearly been a strong performer in 2016.
A key reason for this is the fact that US interest rates have risen at a much slower pace than expected. When the Federal Reserve increased interest rates in December, it was expected that there would be as many as four rate rises this year, but with none by May, this figure is unlikely to be met. As such, interest-producing assets have been less enticing than was anticipated and the price of gold has risen.
Looking ahead, gold’s price could be held back by rate rises that could recommence as soon as next month. But with the outlook for the global economy being somewhat uncertain, it may continue to be in demand due to gold being a perceived store of wealth during challenging economic times.
Black gold makes a comeback
However, while gold has risen significantly this year, in the last few months the price of oil has massively overshadowed it. Following a low of $28 per barrel earlier this year, the price of oil has now reached $50 per barrel. That’s a gain of 79% in just a few months and looking ahead, there could be more price rises to come.
That’s largely because the supply/demand imbalance that currently exists is unlikely to last in perpetuity. On the supply side, a low oil price is causing a number of oil producers to endure a period of significant financial pressure. Exploration and investment spend is down and it would be of little surprise for there to be a gradual fall in production over the medium term, since an oil price of $50 is uneconomic for a number of producers.
Meanwhile, on the demand side, the emerging world is likely to increase its consumption of oil and gas at a brisk pace over the coming years. Certainly, cleaner forms of energy will become increasingly important, especially as technology improves. However, fossil fuels such as oil are still likely to be a key part of the energy mix and will help to sustain a strong growth rate across the developing world.
Clearly, the price of oil is hugely volatile and gold has historically been a hedge against economic downturns. On this front, gold may be the more appealing buy for risk-averse investors. However, for long-term investors who can afford to live with a high degree of volatility in the short run, buying a basket of oil producers, explorers and support services companies could be a sound move. In the long run the world is likely to remain highly dependent on black gold in order to grow.
