What is Happening with Gold and Oil in this current state of Global economic Turmoil

The onset of the Coronavirus-related epidemic- like situation in China, just as the world was emerging out of the US-China Trade war imbroglio and the Brexit log jam, has pushed the world economy back into turmoil. Capital markets across the world have started to feel the heat and the effect has also started to spiral down to other commodities and alternative asset classes. At this time, it is very important to see how Gold and Crude oil markets are performing as both of these asset classes exhibit price behaviors that have strong correlation with global political and economic cues.

Gold – At the start of 2020, the three factors that were contributing the most in shaping the world economic climate. The brewing trade war situation between the United States and China, followed by continuing developments in Europe over the January 2020 Brexit due date and third and the most important one, the slowdown in the Chinese economy. On 23 December 2019, the prices of gold had hit a six-week high on account of the worsening global economic outlook on the backdrop of the above three global economic scenarios. At the Break of Dawn of the new year, it was expected that the prices of gold would stabilise as the situation on all of the above three accounts were moving towards an improvement. The Brexit event passed on 31 January 2020 with a positive note in United Kingdom with several important economic indicators already trending upwards, one and half months prior to the event. The United States and China had also agreed to a series of measures to resume normalcy and desist from the mutually destructive imposition of tariffs and counter-tariffs, the effect of which was supposed to translate to a material improvement on the slowdown confronting the Chinese economy. However, two months after the new year broke dawn. Gold prices have reached record levels along with the prices of most other bullion metals. Prices of gold thus move in the opposite direction of major economic indices and is a key indicator that is studied to understand the direction in which business sentiments are moving. Gold which is still considered the most stable of all assets, is an asset of all-weather, providing safety, security and most importantly liquidity and is a preserver of capital and offers refuge to investors in times of turmoil. Given this property, the commodity has assumed the role of an asset that can be banked upon during times of financial distress and as a hedge against market volatility. The current global economic landscape, thus, is still turning the global investor sentiments more jittery as they do not have a favorable outlook on the emerging economic scenario, given the current situation. The dimensions of the current  coronavirus outbreak that is having the most significant impact on the prices of gold, in fact, is that the healthcare authorities across the world working on containing the virus are not able to predict, how long it will be before they are in a position to restrict the spread of this virus. Such a prediction is necessary for countries to plan out contingency measures and make necessary provisions accordingly. The prices of gold thus will continue to rise as long as clarity does not emerge on the containment of the virus outbreak as gold is considered a safe haven asset.

Crude Oil – Crude oil, on the other hand, has a different story. The commodity was trading weak towards the beginning of 2020. The commodity had been struggling for some time on account of weak demand from China, the second-largest economy in the world, which is currently experiencing a slowdown and a subdued global economic outlook released by the International Monetary Fund (IMF) in its report for the year 2019. Brexit, slowdown in the Chinese economy and the United States and China trade war-like situation, while pushing up gold prices were having a distressing effect on crude oil.

The impact of the trade war situation, brewing between the largest and the second-largest economies of the world, on the global economic environment has been significant. The scenario created by both of these countries had depressed business sentiments across the world. Both these countries, being the largest producers and consumers of a large number of commodities, combining together make up the largest marketplace in the world. A weakness in the demand and supply forces in these countries, combined with a tweak in trade tariffs between them disrupts the demand-supply equilibrium of the entire world economy. This not only impacts commodity markets but also has a cascading effect on the world currency and equity markets. Manufacturing activity, including that of mining and transportation, took a severe beating during the past year and had a direct impact on the demand for fuels like crude oil. Crude oil prices have a very high positive correlation with global news factors like the above; however, organisations like OPEC (Organization of Oil Exporting Countries) work towards ameliorating many of these factors by either cutting down or increasing the supply crude oil in the international market as and when the situation demands. However, this time around the economic factors were so strong that their actions did not have the intended effect, with the only hope for crude being the improvement in the macro-economic situation on all the above three fronts. When the year turned over, things did indeed start to look bright on all fronts until the outbreak of the coronavirus epidemic.

During the year 2020, manufacturing activity in China is expected to be subdued, and air travel is also expected to remain subdues as fewer people will prefer to travel by air on account of the scare of the virus. The shipping sector will also suffer a severe brunt of account of the outbreak with massive cuts expected in their revenues. Crude prices have fallen from rear $70 per barrel at the beginning of January 2020 to near $55 per barrel by the end of February 2020. The uncertainty regarding the containment of the coronavirus outbreak and the springing up of new cases of infection time and again will put further downward pressure on oil prices with no signs of respite in the foreseeable future.