Oil holds onto gains, gold stuck at 1900

Oil higher on expected demand

Crude prices are rallying after major producers showed patience over how much to increase production going into the second half of the year and on improving demand prospects now that Europe is poised to vaccinate 70% of the adult EU population in July.  While large parts of Asia continue to struggle with COVID-19, energy markets remain fixated over the overwhelming strong demand that is coming out of the US and Europe.  In normal times, the oil price surge since the beginning of the year would have threatened the upcoming driving/flying season, but coming out of pandemic, that will not derail most travel plans.

The dollar appears poised for a tentative rebound and that could slow down the move higher in crude.  Unless a breakthrough comes out of Tehran and a timetable is set for sanction relief, oil prices seemed destined to continue to climb higher.

Gold

Gold remains steady around the USD1,900 level as investors await the latest checkup over the American labor market.  Gold saw some safe-haven flows after the Turkish central bank governor noted that fears of a premature interest rate cut are unjust.  President Erdogan wants interest rate cuts to support the economy and if he doesn’t get his way, Turkey may have a new central bank governor soon.  The problem for the CBRT is that Turkey is battling structurally higher inflation.  With Turkey throwing down a clampdown on cryptocurrencies, gold has benefitted from all the flows.

Emerging markets are all battling higher inflation and that will mean an unbalanced global economic recovery, which should benefit gold in a plethora of ways.  Gold will eventually become an inflation hedge once the financial markets adjust to a reset in global bond yields.  A stubborn Fed over a complete labor market recovery will mean the dollar will remain vulnerable as the rest of its major trading partners begin tightening.  If gold fails to test the USD1,950 level after this week’s main event, a pullback could be in the cards.

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