Gold vs Oil | The yellow metal rises 13%, Brent plummets 17% in three months: what should you bet on amid rate cuts?

Gold vs Oil: Baskets of basic products, including goldsilver and crude oilamong others, have swung by huge margins since the US Federal Reserve implemented its massive 50 basis point (bp) interest rate cut. Monetary policy rates have varying effects on gold and crude oil prices due to the relative attractiveness of the commodities, which investors seek to protect against global inflation.

US Federal Reserve Chair Jerome Powell said on Monday the US central bank was in no rush to opt for aggressive rate cuts after new data boosted confidence in economic growth and consumer spending. Powell added that More interest rate cuts are in the works. but suggested they would occur at a measured pace aimed at supporting a still healthy economy. Further policy reductions are likely to push gold and oil prices to new near-term trajectory highs.

Also read: Oil Soars 3% From Biggest Monthly Drop in Two Years on Reports Iran Prepares Attack on Israel; Brent rises 3% to $73

Gold vs Oil: Price trend in July-September 2024

Crude oil prices posted a 17 percent loss in the July-September period as fears that a deepening conflict in the Middle East could squeeze crude supplies were overshadowed by waning concerns about global demand. Posting its biggest monthly drop in two years, global benchmark Brent posted a nine percent loss in September on concerns about oversupply.

In September 2024, Brent crude oil recorded its biggest monthly drop since November 2022. This came after the benchmark index plunged for the third consecutive month, posting a 17 percent loss over the past three months, in its biggest quarterly loss in a year.

Also read: Crude View: D-Street experts put Brent at $75-80 in the short term, Morgan Stanley cuts forecast by $5 due to weak demand

The US West Texas Intermediate (WTI) futures benchmark fell seven percent in September in its biggest monthly drop since October 2023, and plunged 16 percent in its biggest quarterly drop since the third quarter of 2023.

On the other hand, gold has risen more than 13 percent in July-September, which would be its best level since the beginning of 2020, after reaching an all-time high of $2,685.42 last week, boosted by the cut in half a percentage point from the United States Federal Reserve. and explosions in the Middle East.

Current prices: On Tuesday, crude oil prices rose about three percent after Iran fired a barrage of ballistic missiles at Israel in retaliation for Israel’s campaign against Tehran’s allies Hezbollah in Lebanon. Alarms rang across Israel and explosions could be heard in Jerusalem and the Jordan River Valley after Israelis piled into bomb shelters.

Brent futures gained $1.86, or 2.6%, to settle at $73.56 a barrel.while US West Texas Intermediate (WTI) crude rose $1.66, or 2.4 percent, to close at $69.83. Earlier in the day, both crude oil benchmarks rose more than five percent.

Gold prices also rose more than one percent on safe haven demand as fears of an all-out war in the Middle East grew after Iran fired ballistic missiles at Israel. Spot gold gained one percent to $2,661.63 an ounce, after hitting a record high of $2,685.42 on Thursday. U.S. gold futures closed up 0.9 percent at $2,690.3.

Also read: Fed turns focus: Why do gold prices follow US Treasury yields? — Explained

Gold vs. Oil: How Do US Federal Reserve Rate Cuts Affect Commodities?

When risk appetite increases, investors generally avoid gold as a safe haven, although its recent gains have been accompanied by a rise in stocks, especially after the US Federal Reserve’s excessive cut, as the Lower interest rates also increase the attractiveness of zero-yield bullion.

Federal Reserve Chairman Jerome Powell on Monday predicted a continued slowdown in the country’s inflation, which could lead to an interest rate cut by the central bank. This measure could eventually remove restrictions on economic activity “over time.”

Also read: Oil posts second straight weekly gain after US Federal Reserve delivers massive 50 basis point rate cut; Brent and WTI gain 4% in 5 days

Analysts said that at this stage the main catalyst appears to be around macroeconomic factors and monetary policy. Therefore, the room for surprises in terms of the pace of interest rate cuts could be the main trigger for gold prices to regain their rally.

An interest rate cut will lower yields and weaken the US dollar, making the yellow metal more attractive to investors. However, if inflationary pressures or better-than-expected economic data emerge, this could temporarily disrupt the trend and put pressure on gold prices.

Also read: Crude oil burns on US Fed rate cut: Brent nears $74 with six-day rise, WTI rebounds on demand optimism

Similarly, interest rate cuts typically boost economic activity and energy demand. US interest rate cuts have supported risk sentiment, weakening the US dollar and supporting crude oil prices. However, analysts said it takes time for rate cuts to support economic activity and oil demand growth.

Historically, lower crude oil prices have alleviated inflationary pressures and reduced retail gasoline and diesel prices.. For the first time in four years, the Powell-led rate-setting panel cut its benchmark rate by 50 basis points last month to 4.75 percent (5 percent). The US central bank had kept the borrowing rate at its highest level in 23 years for 14 consecutive months since July 2023 to combat the worst outbreak of inflation in almost 40 years.

Gold vs Oil: What should you bet on amid the rate cut cycle?

Goldman Sachs raised its gold price forecast to $2,900 per ounce from $2,700 per ounce by early 2025. Analysts said gold is approaching $2,700 per troy ounce, and silver recently hit its highest level in 11 years. Gold and silver are gaining strength due to interest rate cuts by central banks around the world, stimulus efforts from China, and rising global tensions.

Also read: US Fed offers massive 50bp rate cut: FPI inflows translate into stronger INR: Here’s how ‘good’ verdict is for India

“Expectations of further rate cuts, coupled with geopolitical tensions, could support gold and silver prices in the near future. Currently, gold finds support at $2,618-$2,601, with resistance at $2,651-$2,669. Silver has support between $31.00 and $30.80 and resistance between $31.44 and $31.60. In INR terms, gold is backed by $74.750-74.570, with resistance at $75,190-75,380,” said Rahul Kalantri, vice president, commodities, Mehta Equities Ltd.

Traders currently expect a 49 percent chance of another half-point rate cut in November, according to the CME FedWatch tool. Lower interest rates reduce the opportunity cost of holding unprofitable assets like gold, which also benefits from its appeal as a safe haven in times of economic and political uncertainty.

Also read: OPEC+ will suspend for two months the increase in oil production planned for October of 180,000 bpd

On the outlook for MCX gold futures, Jateen Trivedi, VP Research Analyst, Commodities and Currencies at LKP Securities, said: “Gold prices traded positively with gains of $300 in MCX in $75,890 and on Comex close to $2649, an increase of $15. The general trend remains bullish, with support placed at $75,000 and resistance in $76,250- $76,400 in MCX. “Any significant deviation in the data could affect the movement of gold in the short term.”

Turning to crude oil, on the other hand, Citi analysts said a counter-seasonal oil market deficit of around 400,000 barrels per day (bpd) will support Brent crude prices in the range of $70 to $75 a barrel during the next quarter. UBS analysts said in a note to clients that declining global crude stockpiles should support oil prices going forward, sending Brent back above $80 in the coming months.

Also read:Gold Rate Today: The yellow metal rises to a new high on the back of US Federal Reserve rate cut and US dollar weakness. Experts see more advantages

Morgan Stanley cut its Brent price forecast for the fourth quarter of 2024 by $5 per barrel to $75, a level it now sees for every quarter of next year.. It had previously forecast Brent would average $78 in the first quarter of 2025 and decline steadily throughout the year to $75 in the fourth.

“The Chinese central bank announced a 50 basis point RRR cut and undertook stimulus measures to revive the Chinese economy, thereby supporting crude oil prices to lower levels. Rising tensions in the Middle East are also supporting crude oil prices. Crude oil has support between $67.55 and $66.90 and resistance between $69.10 and $69.80. In INR, crude oil has support in $5,630-5,570 while resistance is at $5,775-5,840,” said Rahul Kalantri of Mehta Equities.

Disclaimer: The opinions and recommendations provided in this analysis are those of individual analysts or brokerage firms, not those of Mint. We strongly recommend investors consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.