While weakening Ifo business climate index in Germany and contracting South Korean economy in the first quarter indicate the world economy is not in recovering phase yet despite strong economic data released in the US and China, gold hits $1,278 an ounce on Thursday, finding support from falling equities and note yields. However, the upside movement is limited by strong dollar which surpassed 98 level. Economists from Oxford Economics said should increasing Brent oil prices hit $100 dollar, this would cause decreasing global growth and increasing inflation, given the announcement by the US saying that sanctions will apply to all countries that import Iranian oil as of May 2. In the meantime, Japan’s central bank kept interest rates on hold and announced it would keep the rates at extremely low level at least through 2020 spring.
While Germany’s weakening Ifo business climate index and South Korea’s contracting economy in the first quarter indicated that the weakness in the world economy remains, gold prices were mostly steady on Thursday, after increasing on Wednesday finding support from mixed equities and low note yields
As of 13:52 GMT+3, spot gold was trading at $1,277.49 while dollar index was up to 98.25. US 10-year Treasury yield was at 2.525.
SPI Asset Management’s head of market strategy Stephen Innes said on Reuters, global growth data outside the US was poor while adding that he expected some correction in the markets and focus was back to major economic drivers.
As the US announced that the time given to those countries to cut their oil imports from Iran, which ends on May 2, would not be extended, Oxford Economics said in a note on Wednesday that in case of Brent oil prices hitting $100, global growth would slow down and we would see increase in inflation. While stating increase in prices would be made up by Saudi Arabia’s increasing oil production in the short term, it was underlined that prices could hit $100 in case of a possible supply shock due to tightening market in the long term. According to their simulation, if Brent oil were to increase up to $100 by Q4 2019, that would pull down global growth by 0.6% and cause an increase in inflation by 1.5%. In this case, average inflation would be 4% in 2020 while global growth would go down to 2.5%.
Gold and oil prices are in positive correlation historically due to gold being used as a hedge against oil-led inflation.
In the meantime, Japan central bank (BoJ) kept interest rates on hold while announcing that it would keep interest rates at extremely low levels at least through 2020 spring. As BoJ has been trying to increase inflation for a long time, it is not expected to reach 2% target by March 2022, so BoJ won’t be changing its extra loose monetary policy anytime soon as other major central banks are on hold as well.