Maybe the recent rise in global tensions between America and Iran could be the catalyst to set off the next shift in the oil and gold cycle. Before you dive into gold and oil, however, consider another perspective.
The oil cycle has been oscillating for more than 100 years. When the oil price is high, onlookers start talking about the price of oil being permanently high and refer to such concepts as ‘peak oil’, suggesting we are running out of the black stuff. But in such times, consumers slowly change behaviour, replacing existing cars with more fuel-efficient models, for example, or insulating their lofts. Simultaneously, oil companies invest more in exploration.
It can take several years, but eventually oil demand falls while supply rises — the price can then collapse.
When oil is cheap, we often see the opposite effect.
In recent years, fracking has added a new dimension. When oil is relatively cheap, fracking companies either reduce or temporarily cease activity; when the oil price rises, they step up activity. For this reason, since around 2016 Brent crude oil has been trading in a corridor of between $40 and $80 a barrel.
Gold reacts differently, it is often seen as a hedge against inflation. It soared in price after the 2008 crash, in part because it was seen as a safe haven in times of uncertainty, and in part because of a mistaken belief that record low interest rates and quantitative easing would create inflation.
This all begs the question: will recent rises seen in the oil and gold prices continue? If so, will oil companies and gold miners benefit?
The appetite for another war in the Middle East is not strong; it is hard to judge what will happen next in the region, and for that reason it is far from clear whether oil and gold will continue to rise.
There is another potential winner from a surge in the oil price, and this is an area that ethical investors may be more comfortable with. If the oil price does carry on rising and passes, say, $100 or even $150, then demand for oil alternatives should rise and that especially means renewable energies, demand for which is in any case increasing.
The oil companies themselves are in a difficult position. Those that are not reliant on shipping oil through the Strait of Hormuz will probably see a boost to profits from a high oil price, but fears over climate change are growing. Some describe oil reserves as stranded assets, so the imperative to invest more in oil exploration may not be so great.
By contrast, companies with a strong renewable energies base could be big beneficiaries — a company like Drax, for example, while not an especially fashionable investment, generates around 15% of all UK renewable energies.
As for gold, remember that so far this century, underlying inflation has been weak even when the oil price was high; it feels like a hedge against a non-existent threat. As a ‘safe harbour’ investment, gold may advance – but I believe this depends on how the US and Iran respond to the current crisis…
