What do massive losses in oil mean for the gold price?

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(Kitco News) Oil is seeing some shocking losses as the new trading week begins, but what does it mean for gold prices going forward?

Oil prices saw its weakest level on record as West Texas Intermediate plunged below $5 per barrel on Monday, marking a daily plunge of 76%. The reason for the drop cited by analysts is the excessively abundant supply of oil amid very low demand.

Even negative prices are not being ruled out by some.

“There is no limit to the downside to prices when inventories and pipelines are full,” Andurand Capital hedge fund executive Pierre Andurand tweeted Monday. “Negative prices are possible. I am not saying it will happen. If it does, it would be very short-lived.”

Pierre Andurand@AndurandPierre

To be more specific: about 60% of all Oil ETFs is in June WTI. If june WTI rolls down to May WTI level over the next few weeks, investors in ETF tracking front WTI would lose about 40% of their money, even though front contract WTI will still show $14.50.

Pierre Andurand@AndurandPierre

And there is no limit to the downside to prices when inventories and pipelines are full. Negative prices are possible. I am not saying it will happen. If it does it would be very short lived. But just be careful out there. Oil price is not like an equity price

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The oil market is seeing declines even despite OPEC +’s recent major deal to cut output as oversupply remains a significant issue in light of the fight against coronavirus halting most of the global demand for crude.

“North American storage facilities are full and there is no place to put new production, amid the huge drop in gasoline demand that has resulted in prices at the U.S. pump going for less than $1.00 a gallon at some locations,” said Kitco’s senior technical analyst Jim Wyckoff.

Monday’s oil price losses were also triggered by the May WTI contract expiry, which could mean that a bottom in prices is close by, Bloomberg Intelligence commodity strategist Mike McGlone told Kitco News on Monday.

“The recent crude oil plunge is reflective of the expiring May WTI contract, with no place to go but down and is more likely to mark a bottom in prices… As a similar condition in 2008 did,” McGlone said.

At the moment, the sharp move down in oil is bullish for gold prices, according to analysts.

“The indication for gold is bullish. Lower oil has strong companions in bond yields and plunging interest rates, globally. This enhances the value of non-interest bearing gold and is indicative of the room central banks have to keep stimulating, flushing the system with money, which is also bullish for gold,” McGlone said.

But the bullish trend might not last if oil prices are low for too long, noted Kitco’s senior technical analyst Jim Wyckoff said. “Near-term, it’s bullish for gold from the sense of making for safe-haven demand amid a very anxious marketplace. However, if oil prices stay very low for an extended period of time, that would be bearish for gold—suggesting commodity price deflation,” Wyckoff said.

It is unlikely, however, that oil prices stay this low for long, Wyckoff added. “Crude will push back toward $30 or higher by the end of summer,” he said.

Gold prices once again briefly breached the critical $1,700 an ounce level Monday morning, as bulls remain in control, noted Wyckoff.

“The gold bulls have the firm overall near-term technical advantage amid price uptrends in place on the daily, weekly and monthly charts. Bulls’ next upside price objective is to produce a close in June futures above solid resistance at $1,800.00. Bears’ next near-term downside price objective is pushing futures prices below solid technical support at $1,650.00. First resistance is seen at $1,708.00 and then at $1,725.00,” he wrote Monday.

McGlone is generally bullish on gold at the moment, eventually projecting the precious metal hitting new record highs in U.S.dollar terms. “Gold has made new highs in most currencies and is likely a matter of time that it will in dollar-terms,” he said.

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