Oil or gold – it does not make any difference. Or does it?

Stable economic growth and steady price increase is predicted for America and China by the experts of Capital Economics. We asked the oil and gold specialists, Tom Pugh and Simona Gambarini about market developments. They say that the American and Chinese demand for oil will somewhat increase its price, and have a more significant impact on the price of noble metals. China is determined to make yuan a world currency. To achieve it, they have to accumulate enormous gold supplies again.

Péter Zentai: I chose you to talk about the recent developments on the raw material markets because Capital Economics gave the most accurate predictions in the last years. Where will be the bottom and the top of the oil price in the next 12 months?
Tom Pugh:
If the American Congress approves the agreement on the restriction and international control of the Iranian nuclear programme, then the Brent oil price can drop to 45 dollars per barrel. Regardless of the outcome of this political issue, oil prices will show a decreasing tendency in the next year. We do not expect prices over 60 dollars. The limited oil market boom will be fuelled by the increasing demand of the United States and China…

Technological advancements have been incorporated in every aspect of economy. Agriculture requires less energy, renewable energy sources are entering real economy…
This is evident, but there isn’t any boom in the next five years that would not be connected to the increasing crude oil demand. Furthermore, it is a fact that with time, the increasing productivity and efficiency tied to the technological advancements will decrease the price of oil in the next 10-20 years. As it can be seen in China, it is possible to quickly and greatly decrease the energy required for a product or a service. They keep on modernizing. We believe that in the next few years, the growth of China and America will be so fast and stable that their energy demand will not decrease significantly.

Does the advancement of shale oil and gas change anything?
So far, it does not. Moreover, if the price of a barrel dropped under 45 dollars, this type of extraction would stop and the price of raw oil would start rising again.

Why did the oil price drop so significantly in the last weeks?
Investors have doubts about the future of China. The majority suspects turmoil and economic slowdown, hence decreasing oil demand behind the fall of Chinese stock market.

Aren’t they right?
We think investors who think this way are wrong. We are optimistic about the economic future of China. We think its economic growth is sustainable and longstanding.

Why don’t the conflicts in the Middle-East and the war against ISIS affect the oil market?
They do not because, with the exception of Libya, there is no warfare in oil fields. Iraq is a brilliant example. Even though two thirds of the country is under terrorist control, it is still able to export more oil than before and break records. Why? Its oil fields are in the safe zones.

What is the correlation between gold and crude oil?
Simona Gambarini:
Most importantly, with the fall of the oil price, gold extraction is becoming cheaper – since mining requires oil. If the price of oil rises, then so does the price of gold; if it drops, the price of gold follows – it reflects the developments of the price of oil.

I presume the recent drop in the price of gold did not happen solely for this reason…
The main reason can be broken down to the lack of inflation in the world. It has been proven that the supply-demand system of gold is strongly tied to the inflationary environment. Of course, global turmoil or an outbreak of a civil war in the area of a gold mine can have a significant effect on the present situation, but the main factor is the dynamics of inflation.

Your reasoning is rational and logical, but none of those are key factors in the market. There is a significant inflation in the stock markets of the world: share and property prices are increasing more than the current state of real economy would account for…
This is indisputable. The price of gold, however, has been showing a decreasing tendency. There is no other explanation other than the fear of the inflation has died down. Of course, the ‘problem’ is not that terrible. Demand for physical gold and gold jewellery is stable. However, there has been a serious depreciation of shares that are connected to gold, such as gold mine securities.

Are we at the end of it? Where is its top and bottom in the next 12 months?
Gold and non-ferrous metal investors cannot wait for Fed’s interest rate developments.
We expect the following scenario: as a result of the first, smaller interest rate increase, the price of gold per ounce could drop to 1050 dollars. We believe this would be the bottom point of the current period. However, after realizing that the interest rate increase cycle is stable and lasting, making inflation possible, gold will become more expensive. We expect its price to settle around 1200 dollars by the end of the year, and 1400 dollars per ounce by next year, December.

Will silver and platinum behave similarly to gold?
As for silver, we are ‘bullish’. We think that silver will have a bigger role than gold. In the next period, the majority of silver production will be used by the ‘avant-garde’ industries, significantly increasing the modern industries’ demand on silver. I am not so optimistic about platinum; it is a major element of the jewellery market which is – for us – a rather ‘tricky’ field. Palladium plays a significant role in environmental protection and green technological developments, so I feel optimistic about it.

I still do not see why the price of gold would go up to 1400 dollars by the end of next year?
Because of China and its central bank. China’s gold supply – even though they never officially said it – is at a historical bottom point. Such a state cannot last too long in China, since they have an extremely strong – culturally backed – desire for noble metals; by accumulating enormous gold supplies, they strengthen their sense of security. Their economy will start to grow, and they will begin to increase their gold supply. India will do the same and so will Europe – prepared for geopolitical and other issues. We think the price of gold will certainly go up…

Original date of Hungarian publication: August 6, 2015