OP 2020: Reversal of fortune cuts gold-to-oil price ratio in half

Ole Hansen
Head of Commodity Strategy

Summary:  In 2020, the gold rally fizzles and oil rallies - cutting the gold-to-oil ratio in half from 2019 highs.

Gold begins 2020 hoping that a historic new move higher was set in motion in 2019. As global central banks mobilised maximum policy support for their weakening economies and drove real yields lower and even nominal yields into negative territory, for entire yield curves in the most extreme cases, precious metals rushed higher on the reduction of the cost of carry. Technicians also celebrated the four-year range-bound limbo ending with a bang. 

In the crude oil market, meanwhile, the concerns driving gold higher drove oil lower. This was mostly down to signs of weakening demand growth from slower GDP growth rates, as well as fears that longer-term demand may dry up on trade wars and the electrification of cars. Added pressure on prices came from the supply side, amid surging US production and concerns that OPEC and Russia may struggle to sustain production cuts. Speculators continued to build short positions into late 2019 in the belief that the direction of least resistance lay to the downside. 

In 2020, the tables are turned on both markets.  The gold market rally fizzles out as global central banks ease off the gas on further policy, in a grand admission of the policy error of negative rates. As bond investors smell a general policy shift towards MMT-inspired fiscal stimulus, long bond yields rise steeply. The shift reduces interest in holding non-yielding assets like gold, as investors scramble to invest in companies with pricing power and any asset set to absorb fiscal outlays. Overextended gold longs are ill-prepared for the narrative shift and gold prices are crushed back into the price limbo below 1300.

OPEC and Russia, sensing a slowdown in U.S. shale oil production seize the opportunity and announce a major additional cut to their oil production. The timing also coincides with the next round of Aramco’s IPO which helps to ensure the desired valuation from investors outside the Kingdom. The market is caught off guard and the scramble to cover shorts while adding fresh longs eventually sees WTI crude oil return to $85/b. The gold ratio is halved from its 2019 high of 30 down to 15.  

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