As gold tumbles, manager foresees ‘black gold’ could follow

Investors who are rotating their love of metallic gold into a desire for ‘black gold’ – oil – were given a cautionary warning by Goldman Sachs Asset Management, whose chairman noted a key guide to longer-term supply/demand was falling below oil’s spot price.

Gold lovers were shocked overnight by a sharp 6% price fall, to $1,687 per troy ounce, as news of an anonymous sell order for 31 tonnes circulated in New York trading.

This erased about half the gains bullion made since the start of 2012.

Schroders’ multi-asset team said before the move that it had “become more cautious on gold, which seems to have lost some of its defensive characteristics”.

The team expressed more positivity about ‘black gold’.

“Overall we favour energy due to the continued tight supply and with the tension around Iran’s nuclear program supporting the oil price,” the team said.

But Jim O’Neill, chairman of Goldman Sachs Asset Management, noted the five year forward contract for oil – arguably a better guide to true underlying supply and demand, in his view – was diverging downwards from oil’s prevailing spot price.

It has done so since around the middle of last year.

From mid-2008, the two measures grew apart, but it was as both fell (spot price more sharply) and then rebounded (spot price more weakly).

However, since around mid-2011 they diverged in opposite directions – five year forward moved largely downwards, while the spot price has been volatile in both directions.

O’Neill said: “Data shows that OECD oil demand actually declined in 2011 and, as I have remarked before, China is falling in love with a softer future GDP growth path as well as alternative energies.

“On the supply side, there is evidence that some alternatives are starting to come on stream. Natural gas in the United States is a particularly important example, and one that is still far from appreciated by the financial markets. Having observed the beginnings of the stabilization of the longer term (oil) price since late 2009, I find it a lot more difficult to be as bullish as many others.”

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