【MACRO Insight】Monetary Policy and Geopolitics - Shaping the Future of Gold and Oil Markets!?

In the ever-evolving global economy, the intertwining influences of monetary policy and geopolitical factors are reshaping the future of the gold and crude oil markets. This spring, the gold market saw a significant uptrend unexpectedly, while Brent crude oil prices displayed surprising stability. These market dynamics not only reflect the complexity of the global economy but also reveal investors' reassessment of various asset classes.

This spring, the gold market experienced a remarkable surge, with the gold price rising nearly 20% in just a few weeks, and a cumulative increase of 21.7% in the first half of the year. This increase occurred in an environment where gold prices should have fallen, that is, during a period of rising real interest rates. However, the collapse of the traditional negative correlation between gold prices and real interest rates has prompted the market to rethink the logic of gold investment. Despite the U.S. Producer Price Index (PPI) exerting some pressure on gold prices, the gold price has remained stable above the key support level of $2400 per ounce.

At the same time, Brent crude oil prices have fluctuated within a narrow range of $75 to $90 per barrel, a price stability mainly due to OPEC+'s production reduction strategy. Since the beginning of 2021, OPEC+ has gradually increased crude oil production, gradually lifting the production reduction agreement implemented during the pandemic. However, in October 2022, the organization announced a new production reduction plan and further reduced production. PVM Oil analyst Tamas Varga emphasized that the purpose of OPEC+'s production reduction is to maintain oil price stability, while the expectation of declining inflation and the possibility of interest rate cuts have provided support for oil prices.

Although instability in the Middle East usually leads to market concerns about supply disruptions, thus supporting oil prices, this year's situation is not the case. BNP Paribas analyst Aldo Spanger mentioned that the market has not even priced the risks in the Middle East, because OPEC+ led by Saudi Arabia is capable of dealing with these risks. In addition, the uncertainty of demand growth has also limited the rise in oil prices. Swiss Borsen analyst Norbert Ruck pointed out that the current oil market is well supplied, but demand has stagnated in the Western world and emerging markets in Asia.

In the gold market, market expectations show that the possibility of the Federal Reserve cutting interest rates in September is very high, exceeding 90%. Zaye Capital Market's Chief Investment Strategist Naeem Aslam also believes that the Federal Reserve's interest rate cut in September is almost certain. This will continue to support the rise in gold prices. The marginal participants in the gold market are shifting from the West to the East, a shift related to the continuous decline in the West's contribution to the global GDP share. Asian countries, especially China, India, and the Middle East, have a deep historical connection with gold.

The demand from central banks for gold is also increasingly important. After the Russia-Ukraine conflict, the freezing of Russian currency reserves led to a significant acceleration in the demand for gold by central banks. In 2022, the demand for gold by central banks reached a new record of 1000 tons, and in 2023, it almost reached this level. The first quarter of 2024 was the quarter with the most gold purchases by central banks on record. The World Gold Council's “2024 World Gold Survey” shows that 70 central banks believe their gold reserves will continue to grow.Although the market is currently mainly focused on the Federal Reserve's actions, this week economists' focus will turn to the European Central Bank, which will announce its interest rate decision on Thursday.

The market generally expects the European Central Bank to keep interest rates unchanged after the rate cut in June, but the key question is whether the European Central Bank will open the door for a potential rate cut in September. The decline in global interest rates and the reduction in opportunity costs will have a positive impact on the gold market.In addition, the world is facing a debt problem, especially in countries with the highest total debt. Japan ranks first in the world with a debt ratio of more than 400%, and the depreciation of the yen has exacerbated this problem. France ranks second in the world and first in Europe with a debt ratio of 330%. The political situation in the United States is complicated four months before the presidential election, which may also make it more difficult to solve the U.S. debt problem.

Against this backdrop, investors need to re-evaluate their portfolios and consider increasing their allocation to alternative asset classes such as gold to adapt to changes in the investment environment. The new gold model indicates that investors should have a higher allocation to alternative asset classes in their portfolios to adapt to changes in the investment environment. At the same time, despite facing sanctions, Russia can still find alternative markets to maintain its energy exports, which shows that the global energy market has considerable resilience.

The latest developments in the gold and oil markets not only demonstrate the complexity of the global economy but also reflect investors' reassessment of different asset classes. In the duet of the global financial market, the price dynamics of gold and oil are influenced by a variety of factors, including monetary policy, geopolitical risks, market demand, and global debt issues. Investors need to closely monitor these factors to seize future investment opportunities.