Crude Oil and Gold rally hard in year 2022

It is said that any crisis is a boon for gold as the precious metal is normally valued the most when there is a crisis. Gold is known to hold value through some of the worse crises in history and that gives it a tremendous safe haven value. Oil is a slightly different ball game. Since Russia is the second largest producer of oil in the world after the US, any disruption in supply of crude from Russia will leave a deep imprint on the price of oil. That is visible.

Both these commodities have done incredibly well in the last few weeks. Broadly, oil is at a 7-year high while gold is at a 14-month high. Gold had peaked in September 2020 and had been an underperformer in 2021 as the focus shifted to equities and other risk assets. Oil has rallied more than 30% since the start of the year as the global oil markets have remained consistently undersupplied. What exactly is driving crude and gold sharply higher? 

Let us look at crude oil first. In September 2014, the price of crude had touched $100/bbl for the last time. Since then, the glut of shale, the fall in demand due to COVID and restrained supply from the OPEC + Russia combination have kept oil prices buoyant. Since the start of 2022, the price of oil has rallied from $74/bbl to $98/bbl, a 32% rally in less than 2 months. Despite demands from oil consuming nations, OPEC has refused to quickly raise supply.

The ongoing Ukrainian crisis has given a major boost to oil prices. Russia is not just the second largest producer of oil in the world, but also a key supplier to the EU region. Russia alone meets 35% of the energy (oil and gas) needs of EU, and there is no immediate option available. If the war disrupts supplies to EU, then the price of oil and gas is likely to shoot up sharply. It is in anticipation of this shortage that oil futures have already started rising.

Check - Russia Ukraine crisis and impact on global markets

Gold has already rallied from $1,796/oz to $1918/oz since the start of 2022. That is just about 6.8% returns. But this comes on the back of negative -3.5% returns on gold in the year 2021 after a robust 25% return on gold in the year 2020. Back in Sep-20, gold had scaled as high as $2,200/oz but has since corrected sharply. The big question is whether the safe haven demand for gold would once again take it back to the $2,200/oz levels?

While investors are looking at gold as a safe option in these turbulent times, one factor would work against gold. Bond yields are too high globally and at these rates, the opportunity cost of investing in gold is fairly steep. Gold made a lot of sense in 2020 when the pandemic had resulted in near-zero interest levels. That is not the case any longer and the Fed is poised for a long bout of hawkishness. Gold upsides may be restricted.

For now, most investors are finding gold not only an outperformer but also a safe haven. Ironically, since the start of 2022, gold has been the best performing asset class. But with hawkish interest rates, the upsides for gold may be fairly limited from here on.