Already less transitory than forecast, central bankers’i nflation headaches may be about to become more acute as they face the prospect of $100-plus oil that lifts consumers’ price expectations and intensifies simmering wage hike pressures. Brent crude futures, which soared 50% during 2021, are up a further 14% already in 2022 at seven-year highs of $89 a barrel. With production capacity tight, inventories low and geopolitics racking several producing regions, oil is hurtling towards $100 a barrel. And the psychologicali mpact of $100 per barrel oil cannot be understated, especially as US consumers, businesses and politicians fret over inflation at multi-decade or record highs – as the latest U.S. consumer price reading was 7%, representing a40 year-peak.
The key factors driving oil prices higher are optimism with respect to oil demand irrespective of the omicron outbreak, OPEC+ supply restraint, US shale output constraints, and the approach of the peak winter demand, which due to high gas prices is seeing greater oil demand as a substitute.
Gold prices have recently hit their highest level in two months at around $1,840 per ounce, as yields have fallen across the US Treasury curve, the US dollar has weakened, and volatility has returned to the equity market.
Gold has mostly held above $1,800/oz so far in January, after recording its first annual loss in three years during 2021, as resource investors chose to switch into rapidly rising sectors like energy and industrial metals. Gold has outperformed other investment classes – as global stocks have slipped more than 5% and Bitcoin has lost a quarter of its value.
A March rate hike is expected and it will likely be the first of many increases this year. And despite expectations for multiple US interest-rate hikes this year, market are betting that ‘real’ interest rates will stay negative. There is a feeling that real yields will remain negative as the Fed struggles to tighten policy enough to push interest rates above inflation. The U.S. CPI rose at its fastest pace in four decades in December.
ETF holdings are still well above where they were before the Covid-19 crisis started. Gold has just received a very bullish sign from investors who are returning to the precious metal in a big way. SPDR Gold Shares, the largest bullion-backed exchange-traded fund, has within the past week recorded its biggest net inflow in dollar terms since its listing in 2004 — worth $1.63 billion. Changes in ETF holdings are monitored as a gauge of investor interest in longer-term bets on gold.