Could Crude Oil Be The Next Bullish Catalyst For Gold?

Monday October 24, 2016 16:13
(Kitco News) - Oct 24 –In case you haven't noticed, the price of crude oil is bumping up against the $52 barrel per level –trading right around its 2016 highs. There are a number of factors brewing in the background that could support a strong rally move in crude oil.

Could crude oil be the next bullish catalyst for gold? Maybe yes. Rising crude oil prices are inflationary –and gold benefits strongly from a rising inflation environment.

In case you fell asleep in Economics 101 (I did), the price of crude oil is a major input into inflation and inflation expectations.

Why? If the price of crude is higher and rising –it impacts virtually every good and service that changes hands in the economy. Transportation costs filter through economy with a distinct inflationary impact. Not only does rising crude oil prices mean higher gas prices for consumers, it impacts the price of just about everything you buy as well.

Nearly 70% of all freight in America is shipped on trucks. That takes a lot of gasoline. If the price of gas goes up, the trucking company charges its clients more. Major chains like Target, Wal-Mart, Kohl's, produce suppliers, grocery stores, electronics makers are all moving their products across America in a truck.

If you can buy it at your local store –it probably arrived there on a truck. Higher crude oil prices will eventually trickle down to the consumer in the form of higher prices for milk, that new sweater you want to buy as well as that new TV you want to get in time for the Super Bowl. That means inflation. That's bullish for gold.

3 factors which could support higher crude oil prices right now:

The fundamental supply/demand picture may be at a tipping point:
"While much of the oil market paints a picture of a commodity struggling under the weight of a huge surplus, statistical balances suggest that conditions have improved markedly. We suspect that the market is moving more quickly into balance than is generally recognised, and recent trends in inventory levels support this view," wrote Barclays analysts in an Oct. 23 research note.

The technical picture shows crude is ripe for a rally. Well-known technical analyst Louise Yamada told CNBC this week that a current chart pattern targets the $70 per barrel level in crude oil.

Crude oil futures short positions at 9-year high. Crude oil futures could be poised for a big short-covering squeeze –which could provide fuel for the rally.
“Short positions in West Texas Intermediate (WTI) crude oil futures contracts held by producers or merchants totaled more than 540,000 contracts as of October 11, 2016, the most since 2007, according to data from the U.S. Commodity Futures Trading Commission (CFTC). Banks have tightened lending standards for some energy companies as crude oil prices declined throughout 2014 and 2015, and some banks require producers to hedge against future price risk as a condition for lending," according to the U.S. Energy Information Administration.

If a number of shorts are forced to cover –this could provide a springboard to launch crude toward the $70 level in short order.

Gold traders are looking for the next catalyst to move the market. It just may well be crude oil. Trade smart and watch the charts. 

Chart Source: U.S. Energy Information Administration, based on U.S. Commodity Futures Trading Commission and Bloomberg