A global pandemic, an economic crisis and the U.S. Elections… What does this mean for the prices of gold and crude oil? As an investor, should I invest in gold? In oil? Both? Or neither?
There is no doubt that the eventful year of 2020 has changed the way investors approach gold and oil investments. For decades, the world’s biggest market players, oil and gold, have typically been interdependent to one another. According to Market Realist, an institutional-quality market research provider, 60% of the time, oil and gold are directly linked as they are both dollar-denominated assets. This means that the rise and fall of the dollar automatically influences the prices of these commodities.
Another influential factor is inflation. The rise in crude oil prices leads to inflation. Gold, on the other hand, is often considered a hedge against inflation and is sometimes regarded as an “alternative currency”.
Of course, everyone is looking for an investment that is both sensible and rewarding to protect themselves against inflation. Usually, periods of high inflation tend to be periods in which the prices of materials are the lowest. So, investors tend to invest in one or both of the two most popular choices – gold and oil.
Let’s break down what is a better option and whether you should invest in gold or oil.
Investors who choose to invest in gold are investors that prefer safer investments with lower risks. Unlike other commodities, gold has maintained its value throughout time and a safe way to preserve wealth from one generation to the next.
Being resistant to inflation, gold prices rise and fall in sync with the cost of living. Up until recent years, the demand for gold has grown among investors making it an important part of a diversified investment portfolio.
Amid the pandemic, gold prices increased by more than 30% and gold witnessed a new all-time high record of $2,069.40 in August with the approach of the U.S. Elections. Now, following the affirmation of Joe Biden’s win at the U.S. Elections, the prices of gold are said to be skyrocketing again. So, to hedge against inflation and to protect assets against the declining value of currencies, the attention of investors will be drawn back to gold. It was therefore, unsurprising to see the prices of this precious metal rising.
With the passing of the US Elections let’s take a look on how gold prices have been affected by the elections over time.
According to DailyFX, provider of forex news and technical analysis on the trends that influence the global currency markets, there is a linear relationship between gold price and the party in power. In 1980 and 1984 under the presidency of Ronald Regan , the price of gold hit a high of $850 in January of 1980 due to the push of US interest rates towards 20% to curb inflation, but the advance from the start of the year was short-lived as the price of gold dropped to $482 in March of 1980. Whereas In 1984, gold got traded at a price of above $400 in March and continued to drift lower following the 1984 election to register the yearly low ($308) in December. In 1988,under the presidency of Geroge Bush the price of gold registered the yearly high ($482) in January, but dipped below $400 in September. In 1992 under the presidency of Bill Clinton, the price of gold remained under pressure registering the yearly low ($332) just days after the election whereas in 1996 gold prices climbed above $400 during the first quarter and then held below $400 even it being Clinton’s second term as the President. In 2000 and 2004 under the presidency of George W. Bush gold traded $300 and $426 respectively. In the last decade under the presidency of Barack Obama in 2008 gold saw a climb in price resulting in it being $1000 and in 2012, the price of gold started off the year just above $1600 and pushed as high as $1781 in February, but ended up registering the yearly low $1540. In 2016 under the presidency of Donald Trump the price of gold started off the year below $1100 and traded as high as $1366 in July.
To invest in oil, or crude oil, it is important to know what influences the rise and fall of prices, and how to approach oil investments. Oil prices are generally affected by supply and demand. High demand means lower supply, therefore resulting in an increase in prices and vice versa. What makes investment in oil more difficult than other materials is that you cannot simply buy an oil barrel and store it.
This year, the prices of oil have been driven down with the lockdown and reduced demand by the coronavirus restrictions. It is said that prices have dropped to around $73.1 million barrels a day in April. Furthermore, with the newly elected U.S. President, who is in favor of energy-market restrictions, fuel-efficient vehicles and electric cars; oil prices are anticipated to go further down along with lower demand. Another anticipation states that oil demand is to drop by 9 million barrels per day by 2025, as per the International Energy Agency.
With the US elections that passed we can take a look on the impact of the US Presidency election on Crude Oil over the years.
According to Rystad Energy, an independent energy research and business intelligence company, the production of oil in the US has increased on an average of 2.6% under Democrats party Presidents whereas it remained almost flat with an annual average of 0.1% under Republican party Presidents. Oil Industry in the US is said to have seen a turnaround after the exiting of George W. Bush in 2009. Production skyrocketed under Barack Obama’s presidency in 2017 with the thriving new production from shale and tight oil in response to advances in drilling technologies. As shown in the table below the 7.2% CAGR was recorded the highest in US history. Even with the market experiencing a downturn, the production continued to increase after the entrance of Donald Trump in the White House in 2017 with a CAGR of 7.1%. With the increase in the % change and the CAGR in the last decade US became a net crude oil and total product exporter in late 2018 for the first time since the 1950s, and net imports/exports have hovered around zero ever since.
Subsequent to the newly appointed U.S. President and prior to the end of 2020, a sought coronavirus vaccine (developed by Pfizer Inc) is promised to be massively distributed. This foresees a decline in gold and a promising surge in oil after a big slump; that is in response to the positive hope of bringing the virus to an end. So, can a vaccine be a significant step towards the recovery of oil?
Based on my analysis, in such times of uncertainty, investors should be looking into tangible investments that will last. Gold being an alternative currency, makes a valuable investment. On the other hand, investors who prefer to invest in oil should be more concerned about the pandemic and social factors rather than the new presidency.
If you had the opportunity to invest right now… would you choose gold or oil? Or both?