Gold resilient but vulnerable as oil prices drive inflation fears - TD’s Melek
Although gold prices have managed to find some near-term support above $4,600 an ounce, a major Canadian bank says the precious metal remains at the mercy of oil prices, even as its long-term outlook stays bullish.
In his latest note on precious metals, Bart Melek, Head of Commodity Strategy at TD Securities, said that gold is struggling because the oil supply shock—driven by the conflict in the Middle East—is pushing inflation fears higher and forcing central banks to take a more hawkish stance on monetary policy.
“There is a risk that policy will remain relatively restrictive, implying high real carry and a high opportunity cost of holding gold. This is likely why demand from institutional investors, ETFs, and central banks has been weak since the start of the war,” he said.
Melek added that gold prices have so far managed to hold support well above their 200-day moving average, currently near $4,258. As long as this level holds, gold’s long-term uptrend remains intact. Spot gold last traded at $4,619.90 an ounce, up 1.6% on the day.
Although the gold market has remained fairly resilient despite these headwinds, Melek said that rising oil prices remain the biggest risk.
“An oil spike to $150/b could push the yellow metal down to [the 200-day moving average],” he said.
However, Melek remains bullish on gold over the long term and maintains his outlook that prices will end the year above $5,000 an ounce.
“Once the oil market starts to stabilize and inflation signals point lower, we expect the yellow metal to move back into the $5,200 range by year-end. At that point, the Fed should also begin to reverse some of the economic damage from the oil spike by tilting toward its maximum-employment mandate, while debt levels will remain sky-high and pressure on the long
end to fund will continue to build. Worries surrounding financial repression, de-dollarization, and dollar weakness may once again rekindle the debasement trade,” he said.
Melek added that he sees a similar trajectory - and similar risks - for the silver market. He explained that higher oil prices and rising inflation could weigh on global economic activity, reducing industrial demand for silver and pressuring prices.
However, he added that once the energy crisis abates, economic growth and industrial demand should pick up again, supporting higher silver prices.
