• As a ‘risk on’ asset the oil price epitomises the great flip-flop that was the characteristic of financial markets last quarter. Having collapsed from over US$80/bl last autumn back to barely US$50/bl by Christmas, Brent recovered its poise back to US$68 by the end of the quarter. Supply has been constrained as OPEC and Russia introduced swingeing production cuts whilst Venezuela, another big producer, has been in meltdown and Iran’s production is limited by US sanctions. We do not expect much upside from here as these output cuts could be offset by a rise in US shale production. Last year saw supply bottlenecks but these have eased and with rig counts rising supply could surge.
  • Whether Gold is a safe haven asset in times of political or market uncertainty is debatable as returns have been somewhat random and it has been trading in a relatively tight range between US$1250/0z and US$1350/oz despite the most torrid geopolitical climate for decades. Interestingly, gold peaked in February yet again at the top of this range, US$1350/oz proving to be a resistance level which has halted every rally since 2013.
  • The main reason for gold’s lacklustre returns over the last few years is that it is priced in dollars so a stronger greenback makes it more expensive for holders in other currencies. Similarly, the higher interest rates in the US are negative for the yellow metal as Gold is an asset that pays no interest, behaving in effect as a zero-coupon perpetual index-linked bond. With US rates rising to a level higher than inflation then gold loses its lustre. The bull case for Gold is that it is in effect a currency which has not participated in quantitative easing and hence has not been exposed to potential ‘debasement’ (excessive printing). As QE is withdrawn and monetary policy eventually normalises then gold should be a beneficiary of lower real rates. The drawback to this argument though is that ‘normalisation’ seems as far away as ever with Central Banks becoming increasingly dovish and the ‘lower for longer’ narrative stretching ever further into the future.
  • Energy and mining company shares have benefitted from the rise in the underlying commodities and in the general ‘risk on sentiment’ prevalent in financial markets last quarter.

Summary: The oil price bounced last quarter and energy and mining stocks produced strong returns. However, with global growth slowing further progress looks a fairly tall order. Gold remains becalmed.

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