By Barani Krishnan

Investing.com — Aren’t oil and gold both inflation-sensitive commodities? Why then do crude oil prices rise with little restraint, but bullion falls almost indistinguishably?

Shouldn’t the pressure of rising U.S. wages and bottlenecks in global supply chains lift both concurrently, though maybe not equally.

Both yes and no.

The inherent nature of commodities is that their prices go up when the dollar’s purchasing power comes down from higher costs. The dollar can be vulnerable to both these situations. Commodities begin the cycle by rallying under supply-demand pressures. The dollar is then hit by rising inflation. Commodities react to this cycle by moving higher.

It is clear that commodity prices can be used as an indicator of anticipated inflation. This is because commodities are quick to respond to large-scale economic shocks.

Systemic shocks — like this year’s Hurricane Ida, for instance — can decimate commodities supply (in this case, oil) and subsequently increase their costs. By the time the commodity reaches consumers, overall prices would have increased — Ida alone boosted U.S. crude prices by almost 10% — and inflation would be realized.

However, history has shown that commodities with high energy levels are more closely correlated to headline inflation than commodities that are made from metals and agricultural.

Kevin L. Kliesen (business economist, research officer, St Louis Federal Reserve) finds this after studying moves on the S&P GSCI, Thomson Reuters CRB, Bloomberg and FIBER commodity indexes and their impact on inflation over a 25-year period.

This logic tells us that we shouldn’t be surprised by the 72% rally in U.S. crude this year versus the 6% slide in bullion.

Here’s The Alternative Story

Whatever’s printed above is true, but there are also caveats to be mindful of.

Yes, oil is seemingly in terrible short supply now versus demand, a situation we’re told will only get worse during the winter as more of the commodity is used to generate power and heat from an expected lack of sufficient and coal.

That’s not even considering that Americans might suddenly have the impulse to drive more in the winter than the past summer, as crazy as the world is getting. And while we’re considering wild contingencies, let’s consider real ones too: that the flying population will literally hit the skies in the new year as all pandemic restraints for travel are lifted.

We heard earlier this week from the chief executive of the world’s largest oil producing company that “spare capacity is shrinking” ahead of the international lift-off for travel and it was a “huge concern” for the company. “If there’s aviation pick up next year, that spare capacity will be depleted,” Amin Nasser of Saudi Aramco Bloomberg was informed by (SE:). “It’s now getting to a situation where there’s limited supply — whatever is left that’s spare is declining rapidly.”

Nasser has the gall to say that when the kingdom of Saudi Arabia, which runs Aramco and also OPEC+, will not let the global alliance of oil exporters increase production by more than the 400,000 barrels per day agreed to months ago — when the supply-demand situation then was a lot less dynamic than it is today.

Each OPEC+ conference this year provided an opportunity to discuss the market to the extent crude prices are at or near pre-pandemic peak.

And right on cue on Friday, a delegate of OPEC+’s Joint Technical Committee, speaking ahead of Thursday’s meeting of the alliance’s oil ministers, said there will likely be “a tighter Q4 oil market” as reopenings from the pandemic intensify and more supply is held back than necessary. In case of any ambiguity on how OPEC+ would respond to the situation, Algeria was out with the cartel’s megaphone to reinforce the mantra: 400K and no more.

Gold continues to fall in value, despite its status as an inflation hedge. Bullion’s safe-haven standing has been turned into a joke this year by short-sellers of the yellow metal, who’ve been allowed to run riot by traders not just tolerating but actually coddling inflation thanks to the policies of the Fed.

It eye-watering debt America has gotten into since the first Covid-19 outbreak — and will get into in the coming years — seems of no consequence for bulls chasing ever-higher prices on the equity and energy markets, all in the name of “hedging” against inflation.

The only asset that was truly designed to protect investors from a possible collapse in fiat currencies’ value is now crumbling. Since its early run to record highs above $2,000 an ounce in August 2020, gold has never been allowed to achieve its true price potential, with often outstaging the centuries-old yellow metal these days in the race for inflows despite arguments about cryptos’ inherent value — or lack of.

In addition to plowing into virtual currency, investors also chase Treasury yields and the dollar higher in the hope that the Fed fails to control inflation. Bond market participants are doing everything they can to stop the Fed from failing to succeed. The aim is to force the Fed’s hand in raising interest rates faster and higher than it intends and deliver a massive win for the bullish T-yield and the dollar positions in play.

There is also speculation that the Fed might be attempting to suppress gold in an effort to preserve the critical 90 levels. This is possible according to a Forbes article in 2019 as well as a Money Metals article published February 2018.

But there’s a more acceptable reason for gold’s behavior. And that, according to Lance Roberts of investment consultancy RIA, has “absolutely nothing” to do with gold itself and everything to do with investors who have gotten too brazen with price pressures under a Fed that still calls inflation at 30-year highs “transitory.” These are people who’re too deeply ensconced in the comfort zone of a whose last meaningful correction was a year ago.

What ails gold is the absence of fear among this crowd who’ve become as dizzy as the financial system that’s been erected upon the beach sand of easy, artificial credit, Roberts said in a September post.

I would argue something else: that gold also lacks a megaphone as loud as OPEC’s, to look after the interest of safe-haven seekers.

Oil Market & Price Roundup

Although oil bulls lost their win over Brent for several weeks, they still managed to deprive bears of joy at U.S. crude. It finished the day slightly lower than last week.

With producer group OPEC+ gearing to talk the market up again at its monthly meeting next Thursday, there is only so much room for crude prices to correct in an environment where traders are perpetually reminded of the cartel’s attempt to keep supplies abysmally low against demand.

Algeria said that the Organization of the Petroleum Exporting Countries had reached a deal with their allies months back to limit crude production. Experts in energy say that the 2 million barrels OPEC planned to add between November and April amounts to a mere drop in the bucket for a market that needs at least a million more barrels each month.

“The oil market deficit might only be 300,000 barrels a day this quarter, but the risks of a demand surge remain elevated,” said Ed Moya, head of research for the Americas at online trading platform OANDA.

Stephen Brennock, oil broker at PVM, concurred, telling Reuters that OPEC+ is “intent on continuing to act as a key pillar of price support” with its strangle power over supply.

London-traded , the global benchmark for oil, finished Friday’s trading up 6 cents, or 0.07%, at $84.38. Brent lost 1.3%, or $1.15 per week, for the week. It was Brent’s first week in the negative after seven straight weeks of wins. Brent rose 7.5% for the month, and is now up 61% year-over-year.

The U.S. ended the day up 0.9% at $83.57 per barrel, or 76 cents. WTI lost 0.2% or 19 cents on the week due to that nominal loss. WTI was up 11% in the month and rose 72% for the year.

Crude prices fell earlier in the week on the possibility of Iran holding nuclear talks with Western powers amid Tehran’s bid to free itself from U.S. sanctions prohibiting the sales of its oil to the world.

The market was also affected by a weekly increase in U.S. inventories, which the Energy Information Administration revealed had doubled market expectations. This was due to the fact that crude oil exporters sent less while refiners increased raw oil imports.

Gold Market & Price Roundup

One more week, another failure to reach $1,800.

Gold’s fate of being stuck — for now at least — in $1,700 territory seems real as the Federal Reserve heads for its monthly meeting on Tuesday and Wednesday, where the noise of U.S. stimulus tapering is likely to get louder.

If that isn’t enough, the U.S. jobs report for September is due next Friday, and any growth number in that might be enough for Fed Chair Jerome Powell and his coterie of policy makers looking to snip $15 billion each month from the central bank’s monthly bond buying of $120 billion.

U.S. Most Active Contract, December, was settled for $18.70 (or 1%) at $1,783.90 an Ounce

It was 0.7% lower for the week. This is its largest loss in six consecutive weeks. Gold rose 1.5% for the month. The gold price has increased in 3 of the last months, but is still 6.4% lower than the previous year.

“Gold is not finding any love with European sovereign funds or for that matter any of the major institutions,” said Phillip Streible, precious metals strategist with Chicago’s Blue Line Futures. “It’s like the moment it hits $1,800, people hit the sell button. That’s what happened today, and the cascade of sell stop orders below just acted like falling pins.”

“This is just the end of a bad week for gold that isn’t going to get any better next week with the Fed meeting and jobs numbers looming. I’m looking at a retest of the $1,750 level and possibly much lower.”

The dollar’s spike to a two-week high also weighed immensely on gold in Friday’s trade as the yellow metal suffered at the advance of its biggest rival.

The dollar surged after data on Friday showed the Fed’s annual inflation gauge hitting a 30-year high in September, keeping the pressure up on the central bank’s policy makers as well as the Biden administration in reigning in surging costs.

U.S. consumers are still at risk of rising inflation, but Americans appear to be resigned towards higher economic costs caused by the coronavirus panademic. This was according to the University of Michigan in its latest edition of closely-watched.

Gold is meant to act as a hedge against inflation but it has struggled to live up to its billing in this year’s market, with expectations of a Fed rate hike weighing on the metal.

Disclaimer Barani Krishnan brings diversity to any market analysis by presenting a variety of perspectives. He sometimes uses contrarian viewpoints and market variables to maintain neutrality. He doesn’t hold any position in commodities or securities that he discusses.