oil and gold- analysis
TRANSCRIPT
-
8/10/2019 Oil and Gold- Analysis
1/90
A COMPARATIVE ANALYSIS OF
OIL VS GOLD
Submitted by:Nitima Malhotra - 15921
Mehul Goyal - 15953
Radhika Bobal - 15950
Apurva Desai - 15942
-
8/10/2019 Oil and Gold- Analysis
2/90
Commodity Exchange
A commodities exchangeis an exchange wherevarious commodities and derivatives products aretraded.
Commodities, may be bought and sold ona commodity exchange in three types of markets: cash,futures and options.
Is considered to be essentially public because anybody
may trade through its member firms.
Regulates the trading practices of its members
-
8/10/2019 Oil and Gold- Analysis
3/90
Provides the rules, procedures, and physical forcommodity trading, oversees trading practices, andgathers and disseminates marketplace information.
Most commodity markets across the world trade inagricultural products and rawmaterials (like wheat, barley, sugar, maize,cotton, cocoa, coffee, milk products, porkbellies, oil, metals, etc.)and contracts based on them.
These contracts can include spotprices, forwards, futures and options on futures.
-
8/10/2019 Oil and Gold- Analysis
4/90
Transactions take place on the commodity exchangefloor, in what is called a pit.
As each transaction is completed in the pit, a pit reporterrecords it; this information is immediately displayed onthe trading floor quotation boardand also appears oncomputer screens in brokerage offices and tradingcenters worldwide.
Commodity market is one of a few investment areas
where an individual with limited capital can makeextraordinary profitsin a relatively short period.
-
8/10/2019 Oil and Gold- Analysis
5/90
History and Evolution Of Commodity Exchanges
The shape of commodity exchanges has largely changedsince the start of the Chicago Board of Trade (CBOT),almost a century-and-a half ago, when farmers coming toChicago at times found no buyers, and had to dump theirunsold cereals in Lake Michigan.
Commodities future trading was evolved from need ofassured continuous supply of seasonal agricultural crops.
With the establishment of the Chicago Board of Trade,the world's first official futures exchange, 1848 marked a
turning point in the history of commodity trading.
-
8/10/2019 Oil and Gold- Analysis
6/90
Farmers and dealers could exchange cash for
wheat.
The futures contracts developed as both
parties committed in a written contract to
respectively deliver and buy grain.
The first of what was then called "to arrive
contracts" were flour, timothy seed and hay,
which came into use in 1849."
-
8/10/2019 Oil and Gold- Analysis
7/90
Commodity exchanges can contribute strongly to theeconomic development of a country and the well-beingof its population.
In many cases, they provide the best way to fill thevacuum left by the withdrawal of governments from
commodity marketing and pricing and, as such, can do agreat deal to soften the pains of adjustment to a (more)liberalized market economy.
Furthermore, they can help to rebalance the bargainingpower of weak groups (such as small farmers).
Some examples of less than successful marketsattempted in recent years are Tiger Shrimp and CheddarCheese.
-
8/10/2019 Oil and Gold- Analysis
8/90
Commodity Exchanges Around The World
Virtually all of the futures exchanges in the United States datefrom the late nineteenth or early twentieth century.
Most of the commodity exchanges in Central and SouthAmerica trade physical commodities, for immediate orforward delivery.
The London Metals Exchange accounted for some 2.5 per centof world turnover.
There are also commodity exchanges of a more traditionalkind, oriented towards physical trade, in these countries,notably the French Rungis market for trade in fruit andvegetables, and the Dutch flower auction in Aalsmeer.
In Africa, the only active commodity futures exchange is inSouth Africa. (The South African Futures Exchange)
-
8/10/2019 Oil and Gold- Analysis
9/90
Another country where exchanges have existed for a long time is Turkey.Around 20 of them have been engaged in active commodity trade.
Other commodity exchanges, not trading futures contracts, have beencreated since 1990 in Romania, Bulgaria, Ukraine, Lithuania and Estonia.Most of them concentrate on organising trade for immediate physical
delivery. In the Czech Republic, Kazakhstan, Indonesia, UAE plans are there to
introduce commodity exchanges.
After the decision of the Chinese Government of creating a centralmarket place in 1988, 30 futures exchanges emerged in late 1993, while
50 wholesale markets were keen to offer futures trading possibilities. Australia, New Zealand, Malaysia and Singapore all have active
commodity futures exchanges.
-
8/10/2019 Oil and Gold- Analysis
10/90
Guidelines for Grant Of Recognition To New National Commodity
Exchange Under The Provisions Of The Forward Contracts (Regulation)
Act, 1952.
Stage One
Applications for setting up of a Nation-wide Multi CommodityExchange are submitted by organizations to the Government through
the Forward Markets Commission the commodity futures market
regulator.
The Government, on being satisfied that it would be in the interest of
trade and also in the public interest to do so, grants the principleapproval.
-
8/10/2019 Oil and Gold- Analysis
11/90
Second Stage
In the second stage, the applicant who has been granted in principleapproval will have to comply with the following conditions within aperiod of one year from the date of grant of in-principle approval. TheExchange shall:
(i) Bring paid up capital of at least Rs 100 crore as per the proposed
equity capital structure (ii) Set up facilities for online trading with national reach and an
efficient real time monitoring and surveillance system;
(iii) Provide for an efficient clearing and settlement system.
(iv) Arrange for an efficient delivery mechanism.
-
8/10/2019 Oil and Gold- Analysis
12/90
(vi) Provide for adequate infrastructure for dissemination of real timeprice and trade information;
(viii) Submit draft rules, regulations and bye-laws for conduct ofbusiness for in-principle approval of the Commission;
(ix) Plan for a network of well organized and capitalized brokeragehouses as members and other intermediaries. However, nomembership subscription or deposit of any nature shall be collectedbefore grant of recognition to the Exchange. No shareholder shall beallowed to be a trading member of the Exchange.
(x) Provide for efficient and effective grievance redressal mechanism.
-
8/10/2019 Oil and Gold- Analysis
13/90
-
8/10/2019 Oil and Gold- Analysis
14/90
Process followed in the Commodities Exchange
Open Outcry Method Operating during regular trading
hours (RTH), the open outcrymethod consists of floor tradersstanding in a trading pit to call outorders, prices, and quantities of a
particular commodity. Different colored jackets are worn by
the traders to indicate their functionon the floor, In addition, complexhand signals (called Arb) are used.
Open outcry exchange trading is the
original style of trading that stockand commodities used to use.
-
8/10/2019 Oil and Gold- Analysis
15/90
Electronic Trading Method
The fully electronic trading
system allows market
participants to trade from
booths at the exchange or
while sitting in a home oroffice thousands of miles
away.
Enables traders toefficiently manage multiple
simultaneous orders and
complex spread
relationships
-
8/10/2019 Oil and Gold- Analysis
16/90
-
8/10/2019 Oil and Gold- Analysis
17/90
Chicago Mercantile Exchange
The Chicago Mercantile Exchange is a futures exchangelocated in Chicago, Illinois.
The CME was founded in 1898 as the Chicago Butter andEgg Board.
Originally, the exchange was a non-profit organization.The exchange demutualized in November 2000, wentpublic in December 2002, and it merged with the ChicagoBoard of Trade in July 2007 to become a designated
contract market of the CME Group Inc.
-
8/10/2019 Oil and Gold- Analysis
18/90
NYSE EuroNext
The New York Stock Exchange traces its origins to 1792,when 24 New York City stockbrokers and merchantssigned the Buttonwood Agreement.
NYSE Euronext includes six cash equities exchanges in
five countries and six derivatives exchanges, togetheroffering trading, clearing and settlement in cashequities;equity, interest, commodity and currency derivatives;and bonds.
With more than 8,000 listed issues, NYSE Euronext is
home to the world's leading companies providing accessto the global liquidity they need to collaborate, competeand grow.
-
8/10/2019 Oil and Gold- Analysis
19/90
Tokyo Mercantile Exchange
The Tokyo Commodity Exchange, Inc.(TOCOM) is Japan's largest derivativesplatform, offering futures contracts on
precious and industrial metals, oil-relatedenergy products, and rubber as wellas options on gold futures.
In 2008, TOCOM was demutualized and it
transformed itself from a membershiporganization into a corporation and changedits name to Tokyo Commodity Exchange, Inc
-
8/10/2019 Oil and Gold- Analysis
20/90
Dalian Commodity Exchange
The Dalian Commodity Exchange(DCE) is a Chinese
futures exchange based in Dalian. It is a non-profit, self-
regulating and membership legal entity established on
February 28, 1993.
The Dalian Commodity Exchange (DCE) is the largest of
Chinas threefutures exchanges by contract volume,
accounting for 42 percent of the total volume of all
futures contracts traded nationwide in the first half of2009, though down from 47 percent in 2008.
-
8/10/2019 Oil and Gold- Analysis
21/90
Multi Commodity Exchange
Multi Commodity Exchange(MCX) is an independent commodityexchange based in India. It was established in 2003 and is basedin Mumbai.
The turnover of the exchange for the fiscal year 2009 was US$ 1.24trillion, and in terms of contracts traded, it was in 2009 the world's
sixth largest commodity exchange. MCX is India's No. 1 commodity exchange with 83% market share in
2009
Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crudeoil and gold in futures trading
The highest traded item is gold.
-
8/10/2019 Oil and Gold- Analysis
22/90
FUNDAMENTALS OF CRUDE
OIL
-
8/10/2019 Oil and Gold- Analysis
23/90
OUTLINE
Oil and its Background
Oil Trading
Demand and Supply of Oil Macroeconomic Variables
Evolution of Crude Oil Market
Indian Oil and Gas Industry Movements in Oil prices
-
8/10/2019 Oil and Gold- Analysis
24/90
Background
It is a naturally occurring ,toxic ,flammable liquid consisting of
a complex mixture of hydrocarbons of various molecular
weights and other liquid organic compounds, that are found
in geologic formations beneath the Earth's surface.
Primarily a Commodity
Crude Oil is also the raw material for many chemical products,
including pharmaceuticals ,solvents ,fertilizers and plastics.
Petroleum in an unrefined state has been utilized by humans
for over 5000 years. Oil in general has been used since
early human history to keep fires ablaze, and also for warfare.
-
8/10/2019 Oil and Gold- Analysis
25/90
Trading in Crude Oil
Initially was a club for only the big guns
Mimimun Contract Size- 1000 Barrels
1 Barrel= 42 Gallons Trading mostly done on Commodity Exchanges
across the globe
ICE and NYMEX are the main exchanges Chicago Mercantile Exchange now allows a
contract size of 500 Barrels
-
8/10/2019 Oil and Gold- Analysis
26/90
Demand for Oil
Global Economic Activity The key driver of oil demand has been robust global
economic growth, particularly in emerging market
economies
-
8/10/2019 Oil and Gold- Analysis
27/90
Increasing Consumption
The rise in global economic activity has been
accompanied by corresponding growth in worldoil consumption. Since 2003, world oil
consumption growth has averaged 1.8 percent per
year.
-
8/10/2019 Oil and Gold- Analysis
28/90
Price Controls and Subsidies
Many emerging market and developing economies
use subsidies and other administrative measuresto control domestic fuel prices.
These administered prices are generally set below
global market prices and, therefore, artificiallyboost the demand for oil.
Indeed, essentially all of the increase in global oil
consumption this year is expected to be in
countries where fuel prices are subsidized anddemand is not fully responsive to price signals.
-
8/10/2019 Oil and Gold- Analysis
29/90
Supply of Oil
Stagnant Production While global demand has remained strong, overall non-
OPEC production growth has slowed. In the past three
years, non-OPEC production growth has been well below
rates seen earlier this decade.
-
8/10/2019 Oil and Gold- Analysis
30/90
Concentrated Spare Capacity
World surplus production capacity remains low.
This puts upward pressure on prices and leavesworld oil markets vulnerable to supply
disruptions.
-
8/10/2019 Oil and Gold- Analysis
31/90
Geopolitical Uncertainty
There is currently a high degree of uncertainty in
world oil markets due to fears about the adequacyof oil supplies in the future.
Current world oil supplies are highly concentrated,
and much of those supplies are held by nations
that limit access to private investment, therebypreventing full development of production
through enhanced expertise and technology
Actual supply disruptions directly affect world oilmarkets due to a loss of physical barrels available
to the market.
-
8/10/2019 Oil and Gold- Analysis
32/90
Price-Inelastic Supply and Demand
The current short-run demand for oil is
relatively price inelastic
In the short run, the supply of oil is inelastic as
well.
If both supply and demand are not very
responsive to prices, it takes large price
increases to return markets to equilibrium ifthey get out of balance temporarily.
-
8/10/2019 Oil and Gold- Analysis
33/90
Macroeconomic Variables
Exchange Rates
Typically, a depreciation of the dollar would be
expected to lead to a rise in the dollar price of oil
As oil is priced in dollars, a lower exchange valueof the dollar reduces the foreign-currency price
and thus boosts demand.
Shocks specific to the oil market can also feedback into exchange rates.
-
8/10/2019 Oil and Gold- Analysis
34/90
Interest Rates
The relation between interest rates and oil prices
can vary, as it depends on the interactions ofmany economic variables
A decline in interest rates by itself might be
expected to raise oil prices to some extent,
suggesting a negative correlation between these
two variables.
But if the decline in interest rates is in reaction to
a downturn in economic activity, oil prices mayvery well fall in response to that weaker demand,
resulting in a positive correlation.
-
8/10/2019 Oil and Gold- Analysis
35/90
Indian Oil and Gas Industry
The origin of oil & gas industry in India can betraced back to 1867 when oil was struck atMakum near Margherita in Assam.
At the time of Independence in 1947, the Oil &Gas industry was controlled by internationalcompanies.
India's domestic oil production was just 250,000tonnes per annum and the entire productionwas from one stateAssam.
The foundation of the Oil & Gas Industry in Indiawas laid by the Industrial Policy Resolution,1954, when the government announced thatpetroleum would be the core sector industry.
-
8/10/2019 Oil and Gold- Analysis
36/90
During 1960s, a number of oil and gas-bearingstructures were discovered by ONGC in Gujarat
and Assam. Discovery of oil in significant quantities in
Bombay High in February, 1974 opened up newavenues of oil exploration in offshore areas.
During 1970s and till mid 1980s exploratoryefforts by ONGC and OIL India yieldeddiscoveries of oil and gas in a number ofstructures in Bassein, Tapti, Krishna-Godavari-
Cauvery basins, Cachar (Assam), Nagaland, andTripura.
-
8/10/2019 Oil and Gold- Analysis
37/90
In 1984-85, India achieved a self-sufficiency levelof 70% in petroleum products.
In 1984, Gas Authority of India Ltd. (GAIL) wasset up to look after transportation, processingand marketing of natural gas and natural gasliquids.
By the end of 1980s, the petroleum sector wasin the doldrums. Oil production had begun todecline whereas there was a steady increase inconsumption and domestic oil production wasable to meet only about 35% of the domestic
requirement. The situation was furthercompounded by the resource crunch in early1990s.
-
8/10/2019 Oil and Gold- Analysis
38/90
The government in order to increase explorationactivity, approved the New Exploration LicensingPolicy (NELP) in March 1997 to ensure level playing
field in the upstream sector between private andpublic sector companies in all fiscal, financial andcontractual matters.
To meet its growing petroleum demand, India isinvesting heavily in oil fields abroad. India's state-owned oil firms already have stakes in oil and gasfields in Russia, Sudan, Iraq, Libya, Egypt, Qatar,Ivory Coast, Australia, Vietnam and Myanmar.
Oil and Gas Industry has a vital role to play in
India's energy security and if India has to sustain itshigh economic growth rate.
-
8/10/2019 Oil and Gold- Analysis
39/90
MOVEMENTS
IN OIL PRICES
MONTHLY MOVEMENTS:
-
8/10/2019 Oil and Gold- Analysis
40/90
MONTHLY MOVEMENTS:
0
20
40
60
80
100
120
140
Aug-0
7
Sep-0
7
Oct-07
Nov-0
7
Dec-0
7
Jan-0
8
Feb-0
8
Mar-08
Apr-08
May-0
8
Jun-0
8
Jul-08
Aug-0
8
Sep-0
8
Oct-08
Nov-08
Dec-0
8
Jan-0
9
Feb-0
9
Mar-09
Apr-09
May-0
9
Jun-0
9
Jul-09
Aug-0
9
Sep-0
9
Oct-09
Nov-0
9
Dec-0
9
Jan-1
0
Feb-1
0
Mar-10
Apr-10
May-1
0
Jun-1
0
Jul-10
Aug-1
0
World Crude Oil Prices (USD per Barrel)
World Crude Oil Prices (USD per Barrel):
-
8/10/2019 Oil and Gold- Analysis
41/90
75.91
81.27
90.3289.76
85.53
Aug-07 Sep-07 Oct-07 Nov-07 Dec-07
Crude Oil Prices (USD per Barrel)-2007
Crude Oil Prices (USD per Barrel)-2007
-
8/10/2019 Oil and Gold- Analysis
42/90
0
20
40
60
80
100
120
140
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
AxisTitle
Crude Oil Prices (USD per Barrel)-2008
-
8/10/2019 Oil and Gold- Analysis
43/90
Crude Oil Prices (USD per
Barrel)-2009, 71.99
0
10
20
30
40
50
60
70
80
90
Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09
Crude Oil Prices (USD per Barrel)-2009
-
8/10/2019 Oil and Gold- Analysis
44/90
75.9877.6
83.56
67.91
75.09 74.69
71.2873.56
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10
Crude Oil Prices (USD per Barrel)-2010
Crude Oil Prices (USD per Barrel)-2010
YEARLY MOVEMENTS
-
8/10/2019 Oil and Gold- Analysis
45/90
YEARLY MOVEMENTS
Crude Oil Prices (USD per
Barrel, $70.67
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
Crude Oil Prices (USD per Barrel
-
8/10/2019 Oil and Gold- Analysis
46/90
$27.39
$23.00 $22.81
$27.69
$37.66
2000 2001 2002 2003 2004
Crude Oil Prices (USD per Barrel
Crude Oil Prices (USD per Barrel
-
8/10/2019 Oil and Gold- Analysis
47/90
$50.04
$58.30
$64.20
$91.48
$53.48
$70.67
2005 2006 2007 2008 2009 2010 Partial
Crude Oil Prices (USD per Barrel
Crude Oil Prices (USD per Barrel
-
8/10/2019 Oil and Gold- Analysis
48/90
-
8/10/2019 Oil and Gold- Analysis
49/90
OUTLINE
Gold and its background
Timeline of Gold trading
Demand and Supply of Gold
Gold as an Investment Avenue
Factors affecting Gold Prices
Movements in gold prices and reasons forfluctuations
-
8/10/2019 Oil and Gold- Analysis
50/90
About Gold and its Background
Gold, the first metal used by humans, remains one of themost valued metals since prehistoric times.
Primarily a monetary asset, and partly a commodity
The distinction between gold and commodities is important.Gold has maintained its value in after-inflation terms overthe long run, while commodities have declined.
Some analysts like to think of gold as a currency without acountry. It is an internationally recognized asset that is notdependent upon any governments promise to pay.
-
8/10/2019 Oil and Gold- Analysis
51/90
TIMELINE OF GOLD TRADING
20thCentury- Since 1919 London market set the price for Golddaily around the world
Major interruption- World War II which forced all the
participating governments to use the gold to support theirmilitary operations
1954- London Gold market reopened and Gold trading began inearnest for Europe
1960s Beginning- U.S. Government banned ownership of Gold.Standard price of $35.0875/oz decided for purchasing and sellingGold between U.S. and Europe central banks.
-
8/10/2019 Oil and Gold- Analysis
52/90
At the end of this decade, London market had to shut down for 2 weeksstraight to stabilize prices and private investors were shut out.
1970s- Freeing of Markets- U.S. Govt. banned all gold transactions in1971. Intended to stop dollar outside from converting to gold. Theyweakened the $ by increasing gold to $38/oz
Two years later they repeated the same devaluation and gold pricebecame $42/oz, but gold trading did not stop!
U.S. Govt. gave up and full blown trading was allowed in 1975 on NYCommodity Exchange and Chicago International Monetary Market
-
8/10/2019 Oil and Gold- Analysis
53/90
Many Governments started liquidating their stock for hard cash. IMFunloaded over 30% of its gold portfolio. This was a full reversal fromthe last decade
1980s- Market Boom and Bust- The appetite for gold continued. Goldbecame the new safety. It took the sudden jarring of the Black Mondayand the market collapse of October 19, 1987 to momentarily stall theclimb of Gold prices and further investment
By next year gold started trading massively globally. The ice waspermanently broken when an anonymous buyer started gobbling uphuge portions of gold and gold futures. It was later identified as theJapanese Govt.
Germany joined in 1993 and India and Turkey joined the bandwagonwith Russia in 1994
-
8/10/2019 Oil and Gold- Analysis
54/90
Modern Day Status- London Market continues to be the standard for goldcontracts. At 10.30 a.m. and 3 p.m. daily gold prices are set and published,which are then used as official prices by producers, consumers and centralbanks.
The NY market alternatively, opens as the second the London fix takes placeand gold then trades throughout the day.
CONCLUSION: As long as the perceived value of gold continues, the metal willcontinue to stand on its own as an asset that can be traded. And, withtoday's current financial instabilities, it will be no surprise that gold willcontinue to be seen as a safe harbor for battered portfolios.
The primary risk to gold commodity markets and their growth continues tobe government involvement and regulatory restrictions on ownership, whichcould again be the death knell of gold market trading in the future.
-
8/10/2019 Oil and Gold- Analysis
55/90
DEMAND AND SUPPLY OF GOLD
DEMAND
Jewellerydemand
Investmentdemand
Industrialdemand
-
8/10/2019 Oil and Gold- Analysis
56/90
SUPPLY
Mineproduction
Recycledgold(scrap)
Centralbanks
Goldproduction
http://www.invest.gold.org/assets/image/invest/img/charts/stockflowpie3_en.gifhttp://www.invest.gold.org/assets/image/invest/img/charts/stockflowpie2_en.gif -
8/10/2019 Oil and Gold- Analysis
57/90
http://www.invest.gold.org/assets/image/invest/img/charts/stockflowpie3_en.gifhttp://www.invest.gold.org/assets/image/invest/img/charts/stockflowpie2_en.gifhttp://www.invest.gold.org/assets/image/invest/img/charts/stockflowpie1_en.gif -
8/10/2019 Oil and Gold- Analysis
58/90
GOLD AS AN INVESTMENT
AVENUEGold has attracted investors throughout the centuries,protecting their wealth and providing a 'safe haven' in
troubled or uncertain times. This appeal remains compelling
for modern investors
-
8/10/2019 Oil and Gold- Analysis
59/90
WHY GOLD?
Safehaven
PortfolioDiversific
ation
InflationHedge
DollarHedge
RiskManage
ment
Demandand
Supply
-
8/10/2019 Oil and Gold- Analysis
60/90
HOW TO INVEST IN GOLD?
Bars
Coins
Exchange-traded
instruments
Certificates
Accounts
Derivatives, CFDs and
spread betting
Mining companies
MAIN FACTORS INFLUENCING GOLD
-
8/10/2019 Oil and Gold- Analysis
61/90
MAIN FACTORS INFLUENCING GOLD
PRICES
Tighteningof gold
supply
Inflationand
interestrates
Currencyfluctuation
Geo-political
concerns
MOVEMENTS IN GOLD PRICES AND
-
8/10/2019 Oil and Gold- Analysis
62/90
MOVEMENTS IN GOLD PRICES AND
REASONS FOR FLUCTUATIONS
MONTHLY MOVEMENTS
Gold Price
(US$/ounce)-2006,
629.42
0.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
800.00
Jan/06 Feb/06 Mar/06 Apr/06 May/06 Jun/06 Jul/06 Aug/06 Sep/06 Oct/06 Nov/06 Dec/06
Gold Price (US$/ounce)-2006
FINDINGS
-
8/10/2019 Oil and Gold- Analysis
63/90
FINDINGS Average $590, Range $524.75-$725.00
The price rallies almost continuously in the first half of the year, reaching a26-year high of $725 on 12 May, supported by a weaker dollar and risinginflation, as well as political factors, notably continued tensions in theMiddle East.
In the second quarter, the gold price traded in a range of $567/oz to $725/ozwhich is exceptionally wide for gold.
Attendant on this was a level of volatility not seen since 1983, withannualized 22-day volatility just breaching 40%.
By the end of September the market calmed at 25% the average volatility
Year-on-year, investors were still reaping substantial benefits in the form ofreturns of 41%, based on quarterly average prices.
Nonetheless, high volatility took its toll on the jewellery market. It was onlyas the quarter drew to a close that demand from this sector began to re-emerge, thereby redefining a new price floor.
India accounted for no less than 43% of global retail investment demand forgold jewellery in Q2
-
8/10/2019 Oil and Gold- Analysis
64/90
2007
0.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
800.00
900.00
Jan/07 Feb/07 Mar/07 Apr/07 May/07 Jun/07 Jul/07 Aug/07 Sep/07 Oct/07 Nov/07 Dec/07
Gold Price (US$/ounce)-2007
Gold Price (US$/ounce)-2007
FINDINGS
-
8/10/2019 Oil and Gold- Analysis
65/90
FINDINGS
Factors affecting the Gold market in 2007-
Jewellerydemand was 6% higher in 2007 than in 2006 in tonnage termsand 22% higher in dollar terms, making a new dollar record at $54bn.
Demand in India, particularly weak in Q1 2006, rose 48% in tonnage terms
Supply and Demand
The economies of a number of golds key markets notably India, China
and the Middle East were all strong, some very strong. The second factor was favourable price volatility and price movements.
Industrial Demand and Dental Demand
reached a new record at 465.5 tonnes in 2007, a rise of 2% on 2006.
Investment
2007 started as a mixed year for gold investment with strong rises in retailinvestment coinciding with relatively small inflows into Exchange TradedFunds and substantial disinvestment from the inferred investment
category. Total (net) investment for the first half year, adding all theseelements together, amounted to just 32.5 tonnes, or $663m.
-
8/10/2019 Oil and Gold- Analysis
66/90
2008
Gold Price (US$/ounce)-2008,
822.00
0.00
200.00
400.00
600.00
800.00
1,000.00
1,200.00
Jan/08 Feb/08 Mar/08 Apr/08 May/08 Jun/08 Jul/08 Aug/08 Sep/08 Oct/08 Nov/08 Dec/08
AxisTitle
Gold Price (US$/ounce)-2008
-
8/10/2019 Oil and Gold- Analysis
67/90
FINDINGS
Equities were the worst performer as it became increasingly clear that thecredit crisis was not going to be resolved quickly and as macro economicdata, particularly from the US, hinted at a slowdown that was becomingboth deeper and more broad based
All of this has been good for the US bond market. The yield on benchmark10-year Treasury bonds tumbled from 4.6% at the end of Q3 to 4.0% at the
end of Q4. It was gold and the broader commodity complex that stole the
limelight. The dollar gold price rallied by 12% in Q4, to end the year at$833.92, just short of its all time record of $850/oz in January 1980
The macro economic picture in the United States continued to deterioratein the fourth quarter
The gold price reached a new record in Q1 08, for the second consecutivequarter, fixing at $1011/oz on the London PM fix on March 17. The averagequarterly price climbed to $924.83/oz, up $138.58/oz from the finalquarter of last year.
Increased investor interest seems to have been the main driving force
behind the price increase again.
The fallout from the credit crisis continued to dominate market trends in
-
8/10/2019 Oil and Gold- Analysis
68/90
The fallout from the credit crisis continued to dominate market trends inQ1 08. The break in the gold price through the $1000/oz level, to fix atsuccessive records of $1003.50/oz and $1011.25/oz on March 14 andMarch 17 on the London PM fix, coincided with news of the joint JP
Morgan Chase/US Federal Reserve Bank bail out of Bear Sterns. The macro economic picture in the United States went from bad to worse
in the first quarter, with weakness in the housing and financial sectorsspreading deeper into the broader economy.
The rise in oil prices was the main factor behind the excellentperformance of some of the commodity baskets.
The third quarter brought with it one of the largest financial crisis inhistory. One-by-one mega-financial institutions, like Freddie Mac, FannieMae, Merrill Lynch, Lehman Brothers, AIG and Washington Mutualannounced that they could no longer function in the current creditenvironment, and were either taken into public ownership or swallowed
up by healthier financial institutions. World equity markets plummetedand credit conditions tightened still further
Q3 highlights an important point that we often make: there is no stablecorrelation between changes in the price of gold and changes in the priceof oil. Sometimes the two move in tandem, but at other times they dont.
Over the past twenty years, gold and oil have moved in the same direction
twelve times, but in opposite directions in eight times.
-
8/10/2019 Oil and Gold- Analysis
69/90
2009
0.00
200.00
400.00
600.00
800.00
1,000.00
1,200.00
Jan/09 Feb/09 Mar/09 Apr/09 May/09 Jun/09 Jul/09 Aug/09 Sep/09 Oct/09 Nov/09 Dec/09
Gold Price (US$/ounce)-2009
Gold Price (US$/ounce)-2009
FINDINGS
-
8/10/2019 Oil and Gold- Analysis
70/90
FINDINGS Tonnage gold demand in the first quarter of 2009 was up a strong 38% on the
levels of a year earlier. In $US value terms, this represented a 36% rise to
$29.7bn. Global economic conditions continued to take their toll on jewelleryand industrial demand while underpinning safe haven demand from investors.
The gold price averaged $US908.41 during Q1, down 2% on the Q1 2008 average
The biggest source of growth in demand for gold was investment. Identifiableinvestment demand reached 595.9 tonnes in Q1, up 248% from 171.3 tonnes inQ1 2008. Taking into account inferred investment, which in the first quarter
largely reflected investor flows into bullion accounts, total investment off-takereached 711.2 tonnes, up 173% on the levels of a year earlier
Gold supply in Q1 was up 34% relative to year-earlier levels.
Of course, Q3 2008 was an exceptionally strong quarter, benefiting from thestart of the safe haven investor flows in the west as financial sector concerns
escalated as well as a surge in gold demand in several key non-western marketsin response to a correction in the gold price.
If we compare the 12 months to September 2009 against the correspondingperiod a year earlier, tonnage demand was up 2%. Alternatively, if we take theaverage Q3 result over the five years to 2007 (832 tonnes) and compare Q3 2009against this benchmark of a more typical Q3, the decline in tonnage is just 4%.
All three sectors of gold demand experienced an increase in tonnage
-
8/10/2019 Oil and Gold- Analysis
71/90
All three sectors of gold demand experienced an increase in tonnagerelative to Q2 2009, but a decline relative to Q3 2008. The biggest declinerelative to year-earlier levels was in identifiable investment, which fell46%. Using the five year average benchmark described earlier, investment
recorded a 73% rise. The $US gold price in 2009, at an average of $972.35/oz, was up 12% on
$871.96 in 2008. In Q4, the gold price averaged $1,099.63, up a verystrong 38% on the levels of Q4 2008.
The gold price finished 2009 25% higher than where it started. Afterrecovering from a first quarter correction,the middle part of the year was
broadly characterised by a period of range trading in a $US900-$1,000/ozband. Finally, the sustained break above the key $1,000/oz level came inearly September, with record highs being repeatedly tested during theremainder of the year.
In fact, it is clear from this analysis that the sources of support for the
gold price were broadly based during 2009. Furthermore, an importantbalancing effect came into play between the various sectors at differentstages during the year. Nowhere was this balancing effect stronger than inthe US. In 2009, exceptional growth in retail investment demand largelyoffset a 20% decline in jewellery demand to leave total tonnage virtuallyunchanged on 2008 levels.
-
8/10/2019 Oil and Gold- Analysis
72/90
2010
1,116.51
1,095.41
1,113.34
1,148.69
1,205.43
1,232.92
1,192.97
1,216.68
Jan/10 Feb/10 Mar/10 Apr/10 May/10 Jun/10 Jul/10 Aug/10
Gold Price (US$/ounce)-2010
Gold Price (US$/ounce)-2010
-
8/10/2019 Oil and Gold- Analysis
73/90
FINDINGS Global economic data continued to show signs of growth during Q1 2010, as
the world emerges from the so-called Great Recession. The first quarter of 2010 was also marked by concerns that some European
countries would not be able to meet their debt obligations.
Indeed, the euro had fallen by 5.4% against the dollar (US$) in Decemberalone, and the British pound did not fare much better, depreciating by 3.9%against the dollar over the same period.
Luckily for the gold market, a stronger dollar against the euro or the pounddoes not necessarily mean lower prices. In fact, gold is affected by a myriadof factors and fundamental drivers of demand and supply help offset some ofthe short-term effects of currency appreciation. Many developing economiesare recovering faster than their developed counterparts, especially in
countries like India and China, which are key markets in gold consumption.This, in turn, can have positive effects for gold demand.
The 3-year correlation of weekly gold returns versus the trade weighted dollarwas about -0.51, by the end of Q1 2010.
Moreover, continuing growth in other developing economies such as China islikely to support future gold demand.
-
8/10/2019 Oil and Gold- Analysis
74/90
YEARLY MOVEMENTS
0.00
200.00
400.00
600.00
800.00
1,000.00
1,200.00
1,400.00
Gold Price (US$/ounce)
Gold Price (US$/ounce)
-
8/10/2019 Oil and Gold- Analysis
75/90
Were gold prices driven by oil prices, or were the
two commodity prices driven up by other forcesacting on each with similar effect?
This brings up the important question ofcausation.
-
8/10/2019 Oil and Gold- Analysis
76/90
Relationship between oil and gold
Pertinent factors affecting the gold price:
-
8/10/2019 Oil and Gold- Analysis
77/90
For many years it was believed that the oil price had a direct impact on the
gold price. Then the creditcruncharrived, after the oil price had hit $145+
before tumbling to $35 a barrel. Since then the oil price has been treated as
irrelevant to the gold price.
Its major role was to give us a feel of the state of the global economy. After
all, economies still run on oil. Nothing on that front has changed, so oil
remains a good measure of the state of the world economy. But since 2007a great deal has changed in the global economy and the oil market. These
changes are structural and long-term. But they have to be see in
perspective for their impact on the future oil price and indirectly the gold
price.
The major structural change has been the expansion of the client base of
the oil market and so the potential for huge demand growth. While oil
supply is growing, we do not believe that in a growing world economy there
will be enough supply to satisfy demand.
Pertinent factors affecting the gold price:
Some long-term studies show gold to be strongly correlated with
-
8/10/2019 Oil and Gold- Analysis
78/90
economic indicators other than oil prices, such as the S & P 500 and 10-
year T-bills .Investors should also study the circumstances surrounding the
tight gold-oil relationship of the '70s, and consider the
similarities/differences in respect to the current oil bull
-
8/10/2019 Oil and Gold- Analysis
79/90
The Oil price will affect the Gold price
The coming massive oil crisis is just over the horizon. Markets wontwait until they
arrive they discount the changes well ahead of them. The picture of a swing in
wealth and power to the east, from the west is shown by the changing shape of oil
demand and supply. Add to that the crises that always attend such power swings
and oil market changes are pointing to the time when gold will hit peak demand and
gold price rise to unseen levels. Then the oil price will influence the gold price as a
joint measure of the state of the global monetary scene.
-
8/10/2019 Oil and Gold- Analysis
80/90
REASON FOR OIL'S SUPERIOR RISE, AND THE RELATIVE
UNDERPERFORMANCE OF GOLD :
1.Peak oil theory
2. Emerging market needing oil, not gold3. Oil is consumed and gone, while there are lots of gold
4. Jewelry market favoring platinum, not gold anymore
5. Central banks having lots of gold to sell
-
8/10/2019 Oil and Gold- Analysis
81/90
GRAPHS OF OIL AND GOLD FROM 2000 TO 2007.
The idea that the oil price is an important driver of the gold price has
l b i i ht b th t i f th ld b h
-
8/10/2019 Oil and Gold- Analysis
82/90
also been given weight by the commentaries of the many gold bugs who,
over recent years, have often cited the rising oil price as a reason to
expect a higher gold price.
Some gold bugs even claim, in one breath, that a higher oil price is bullishfor gold and then, in the next breath, that gold is money. It seems not to
have occurred to them that there's no reason for the demand for money
and the demand for industrial commodities to move in the same
direction.
On a side note, gold is unfortunately not money right now, but in many
respects it still trades as if it were. For example, it typically turns in its
best performances when real economic growth and confidence are
falling.
In a similar way, THE MISTAKEN VIEW THAT THE OIL MARKET IS ANIMPORTANT DRIVER OF THE GOLD MARKET IS CAUSING A
STRONGER CORRELATION BETWEEN THE TWO MARKETS THAN
THERE SHOULD BE, WHICH, IN TURN, REINFORCES THE FAULTY
ANALYSIS.
-
8/10/2019 Oil and Gold- Analysis
83/90
But just as the "dollar is going to plunge due to the widening trade
deficit" idea that was so popular at the end of 2004 was eventually
overwhelmed by real interest rate differentials (the true fundamentaldrivers of intermediate-term exchange-rate trends), we suspect that the
"oil price drives the gold price" idea that is currently quite popular will,
before much longer, be overwhelmed by genuine fundamentals.
IN OUR OPINION, CHANGES IN THE OIL PRICE ARE NEITHER HERENOR THERE AS FAR AS THE PRICE OF GOLD BULLION IS
CONCERNED.
Under the current monetary system the directions of the long-term price
trends in oil and gold will tend to be the same because inflation is aprimary driver of both markets, but it is what's happening on the monetaryfront, not what's happening with oil supply/demand, that matters to the gold
market.
Changes in the oil price do however have an important effect on
-
8/10/2019 Oil and Gold- Analysis
84/90
Changes in the oil price do, however, have an important effect on
gold mining shares, but it's not the effect that most people would
expect. To be specific, as far as gold mining equities are concerned a
rise in the oil price is BEARISH and a fall in the oil price is BULLISH.
The reason, of course, is that gold miners are major CONSUMERS of
oil (a large chunk of a gold miner's costs are energy-related).
Over the last 50 years or so, gold and oil have generally moved together in terms of
-
8/10/2019 Oil and Gold- Analysis
85/90
price, with a positive price correlation of over 80 percent. During this time, the price of oil
in gold ounces has averaged about 15 barrels per ounce. However, with recent soaring oil
prices, the relationship has strayed far from this average.
The size disparity between oil and gold markets must also be considered. While annual
gold production is approximately US$35 billion, annual oil production is US$1.5 trillion, by
far the largest-trading world commodity. As oil prices increase and demand for US dollar
diversification increases, there will be an ever-expanding number of petro dollars and
other offshore dollar holders chasing a relatively small amount of bullion ounces.
In conclusion, the price of oil is poised to rise steadily as the supply/demand imbalance
increases and the dollar declines, even if there are no supply disruptions, terrorist threats
or geopolitical concerns to consider. As this happens, the price of precious metals will
climb until they eventually catch up to their historic ratios.
Should oil producers demand euros, dinars or precious metals in payment for theirproduct, the decline in the US dollar will accelerate while the price of precious metals
explodes. If oil producers and other foreign US dollar holders begin to sell the trillions they
hold and diversify into alternatives, then the price of both oil and precious metals will rise
to levels that today are hard to imagine
CONCLUSION
-
8/10/2019 Oil and Gold- Analysis
86/90
The oil price does not drive the gold price andthe only reason the two markets have similar
long-term trends is that they have one
important long-term driver in common:
monetary inflation.
The correlation we found out using month end
data for 30 years gave us correlation of +0.84.
(PFA the excel sheet for the same)
CONCLUSION
-
8/10/2019 Oil and Gold- Analysis
87/90
There is, however, an inverse relationship between the oil
price and the prices of gold shares, but this relationship
only comes to the fore during periods when the oil price ismoving sharply lower or sharply higher relative to the gold
price.
-
8/10/2019 Oil and Gold- Analysis
88/90
Crude Oil Gold
Risk of supply exhaustion? Yes No
Existence of a supply cartel? Yes No
Elastic demand? No Yes
Demand driven by industry
growth?
Yes No
Impacted by expectations of
uncertainty?
Yes Yes
Qualitative Comparison of the Main Drivers
of Crude Oil and Gold Price Movements
COMPARISON
-
8/10/2019 Oil and Gold- Analysis
89/90
COMPARISON
-
8/10/2019 Oil and Gold- Analysis
90/90
.
THANKYOU!