A prolonged period of low crude oil prices could have an offsetting effect on gold prices, analysts with Bank of America Merrill Lynch said Tuesday.
“Historically, there has been a strong correlation between current account balances of Middle Eastern countries and prices of the yellow metal,” BofA Merrill Lynch metals strategist Michael Widmer said in a report that analyzed the effects of $25-$50/b oil prices through 2020.
“The transmission can work through various channels, with investment and savings probably the most important. Hence, subdued energy quotations may dampen upside to gold,” Widmer said.
NYMEX light crude for March delivery lost $1.75/b Tuesday to close at $27.94/b — its fourth consecutive decline — while Brent crude for April delivery lost $2.56/b to close at $30.32/b.
Moreover, lower oil prices would discourage additional output and exploration in oil producing nations, thereby affecting economic activity in those countries, he noted.
But cheaper oil prices for net-consuming countries in Europe and China should help economic activity in those regions and hence, improve demand for gold and other metals.
That increased demand “would, to some extent, offset the weakness of consumption in oil producing nations,” Widmer said. “In our view, this may be the predominant impact cheaper energy has on the metals and mining space.”
Lower oil prices have already reduced production costs for high-cost aluminum smelters in Russia and global copper producers, Widmer noted. Energy accounts for about 10%-50% of total metals production costs.-Platts