Until very recently, the oil price and gold price tended to follow a similar pattern, as evidence by the below chart. The fundamentals driving these prices differ of course, but over my many years I’ve come to expect the two to rise together, at times languish together and decline in tandem.
When I first bought a few gold stocks, the sector was washed out and companies were unable to raise any capital. Things have changed dramatically in recent months.
“Canada’s junior gold mining sector is on track for its best year for financing in nearly a decade as companies take advantage of soaring gold prices to load up on cash and advance long-delayed exploration and development projects.”
Globe & Mail July 27, 2020
Lack of investor interest is the best ‘buy’ signal I’ve used over the decades. It was lack of interest that inspired me to look at the gold sector when I did. The price of gold was creeping higher but nobody seemed to care.
We’re at that point now – where despite the stability of the price of oil, the stocks are of no interest to investors. Junior energy companies are struggling to raise capital – after all crude inventories are bulging (crude stocks are far above their 5-year average levels) and demand is constrained by COVID-19 right?
What will be the catalyst for the energy stocks to bounce back and resume their relationship with the price of gold? We’re already seeing production and development being curtailed by most companies, and OPEC+ has demonstrated the discipline necessary to re balance supply and demand in due course. Inventories of crude will be absorbed as economies continue to reopen and global trade is picking up steam. It is inevitable that the oil price will continue its climb from current levels.
What if the gold price declines? This is a distinct possibility – there’s so much hype now (in contrast to a year ago). However, the seemingly never ending onslaught of liquidity provided by central banks would suggest otherwise. As long as the opportunity cost of holding the precious metal is negligible, it is likely the price of gold will remain firm for the foreseeable future even if the big gains have already been had.
My own approach is to take profits in the yellow gold and invest the proceeds in black gold. There continue to be solid signs that economies are recovering which bodes well for Texas Tea.