Gold is better positioned than oil to benefit from US-Iran tensions and ASX small caps are showing it today
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If there’s one commodity that has started the decade well, it’s oil. Brent oil has gained 5.2 per cent this week and crude oil has gained 4.2 per cent.
In contrast, some of the top performing commodities of 2019 have been slower. Copper has dropped 0.82 per cent, iron ore has gained 2.75 per cent and gold is up 3.79 per cent.
There’s no question increased hostilities between the US and Iran are the major catalyst for rising oil prices. Last week America assassinated Qasem Soleimani, a high-ranking general in the Iranian army.
Iran’s Supreme Leader has called for “forceful revenge” against the United States.
Any conflict could affect the petroleum industry — particularly attacks on pipelines and tankers, as similar conflicts such as the first Gulf War and the Iranian Revolution did.
But analysts believe an oil run would only sustain for a long period if the situation escalated into war — a scenario they think is unlikely to occur.
While many political commentators have suggested President Trump’s desire for re-election could lead to armed conflict, Washington-based energy analyst Katie Bays, from Sandhill Strategy, said on Friday this desire would actually go against this.
“While warfare may shore up public sentiment towards the President, surging energy costs almost certainly will weaken the US and global economies,” she said.
“Similarly, another military engagement in the Middle East is likely repellant to US voters.
“So, despite near term angst, the marginal barrel of oil likely will continue to come from the US, and as such will not command a long-term geopolitical risk premium.”
Bays set 4 million barrels per day as the supply level that would have to be disrupted, but said it was more likely the appreciation in oil price would wane similarly to the way it did following the attack on Saudi Arabia’s Abqaiq facility last September.
Bloomberg Intelligence analyst Mike McGlone also thinks oil’s rise will be tempered. But he also argued US-Iran tensions supported gold more than crude oil.
Gold has risen as well, but he argued that compared to oil, the supply-demand balance was more healthy.
While both commodities often rise in times of conflict, gold is perceived as a safe haven while oil generally rises because of expected supply or demand impacts.
“The market’s initial reaction to the US airstrike killing of one of Iran’s most powerful generals should fade, but is another catalyst to a more enduring boost to gold than crude oil,” McGlone said.
“OPEC is fighting a losing battle to offset non-OPEC supply and slack demand, in our view. Central-bank buying and exchange-traded-fund inflows are good indicators of gold’s favourable demand versus supply balance.”
He noted gold ETF holdings had risen 1.4 per cent so far this month.
McGlone argued that for gold to not hit $US1,600 ($2,303) by February, history would have to be defied. This is because January is usually a solid month for gold.
“Gold hasn’t had a bad January since 2013 – the metal will approach [US]$1,600 by February if it matches the 5.2 per cent average January increase of the last five years.”
While individual small caps are more affected by project developments, commodity prices can have an impact.
Today, on the first trading day since the assassination, 38 gold stocks were in the green — three times as many as the number of oil stocks that rose today.