Why Are Gold Prices Surging To New Highs While Oil Prices Are Falling?

Gold prices in India have been breaching past highs over a month now. On Wednesday, October gold futures rose by 0.65 percent to a new high of Rs 37,830 per 10 grams. In the international market, gold rates breached the important level of $1,500 an ounce on COMEX after a 1.2 percent increase to touch a six-year high of $1,502.30.

On the other hand, crude oil prices fell in the Wednesday morning session, trading near its seven-month lows. International benchmark for oil prices, Brent crude futures, were trading at $58.97 a barrel.

Why?

The reason for the opposite movement in prices of the two commodities are to do with overall atmosphere of global economy which has shown clear signs of a slowdown aided by US-China trade war and dovish monetary policies by major central banks in the world, including India's RBI.

One of the main reasons is the intensifying US-China trade war. As the two countries fail to come to an agreement, it could mean that their trade activities are declining and will continue to decline, which will results in interest rate cuts by the central bank-Federal Reserve (to push economic growth). Infact, the China's GDP decelerated to a multi-year low in Q2.

Lower interest rates have always boost the appeal of gold, considered a safe haven investment in times of geo-political distress.

Investors choose to stay out of stock market over the uncertainity of the outcome from trade disputes. Since the start of 2019, gold prices gained 17 percent on COMEX.

In India, additional customs duties and withdrawal of funds by FPIs from the stock markets added to the surge in gold prices.

As for oil prices, a slowdown in trade activities will mean lesser demand for oil. US-Sino trade disputes have translated to reduced imports from China, the largest customer for oil producing countries. In fact, the recent attacks on tankers and US drones in the Middle East, which makes passing through the Strait of Hormuz, (a key shipping artery of global oil trade) a risk, did not take oil prices soaring like it ideally would. This indicates that a global slowdown in economic activities has taken precedence over tensions in the Middle East or a decline in crude extraction by the OPEC as well as the US in recent times.

After Trump announced his decision to impose 10 percent tariffs on Chinese goods worth $300 billion, Brent prices have plunged over 9 percent in the past week while sending global stock markets into a tailspin.

Background on US-China trade war

Last week, US president Donald Trump threatened to impose additional tariffs on China's exports, which if implemented will mean that all Chinese goods entering the American soil will be subject to some kind of duties. At the beginning of this week, Chinese yuan breached its politically sensitive level of seven to the US dollar for the first time since 2008 financial crisis.

To this the Trump administration accused China of manipulating its currency as a tactic to make its exports inexpensive, giving them an edge over competitors. To further worsen matters, the US Treasury on Tuesday, officially released a statement labeling China as a "currency manipulator."

In retaliation, China's Commerce Ministry announced that Chinese companies have stopped buying American agricultural products, hurting US farm exports further.

While ideally such a situation would be dealt with negotiations between the two countries, talks have not proven to have solved the disagreements over trade between the two countries for more than a year now.