As the calendar flips to 2023, a seasonal trend takes hold that helps gold prices gain traction. With inflation expectations remaining high and the Fed decelerating its interest rate tightening, gold prices have been able to rally during the end of 2022. Meanwhile, oil prices have been under pressure, despite a global reduction in the volume accepted from Russia. The oil price hit its annual lows in December 2022, forfeiting all of the gains since Russia’s invasion of Ukraine.
OPEC production continued to move higher in December, but the output by the OPEC members trails behind its designated targets. U.S. oil production moved higher in 2022, which also weighed on prices. (see chart). The outlook for 2023 is the Energy Information Administration expects global oil inventories to fall by 0.2 million barrels per day during the H1 of 2023 before rebounding and rising during the H2 of 2023. Along with increasing production, demand has declined. Lockdowns in China and the fear of a global recession have reduced oil demand expectations.
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Seasonality in Gold Prices
There is a seasonal tendency for gold prices that point to an uptrend in January. Seasonality is a tendency of a time series where the data shows that it has a predictable and regular pattern every period during a calendar year. Any predictable pattern that repeats is considered to be seasonal. For example, it gets colder in the wintertime in the Northern Hemisphere.
You can calculate the seasonality by looking at the returns that gold prices produced every month for each year over a specific period. For example, you might want to know if the returns are consistent over the past decade or two. You can see from the chart of the returns of gold over the past ten years that gold prices generally rise in January.
Gold trading has increased by an average of 4.1% during the past decade in January. Over the past 20 years, gold prices have increased 70% of the time, with an average gain of 3.2%. The consistency of the returns in January shows that there is a seasonal tendency for gold prices, where they generally rise in January. January has been the best performing month for gold prices over the past 20 and ten-year periods.
The Technical Point to Higher Gold Prices
A chart of gold prices also points to higher gold prices near-term. Gold prices have touched a 6-month high (see chart below) and are poised to test higher levels. The 20-day moving average of gold prices crossed above the 200-day moving average, which means that a medium-term up trend is now in place.
Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This scenario occurs as the MACD line (the 12-day moving average minus the 26-day moving average) crosses above the MACD signal line (the 9-day moving average of the MACD line). The MACD histogram also crossed above the zero-index level, which is also a buy signal. The combination of accelerating positive momentum and an uptrend points to higher trending prices for gold in January.
Crude Oil Prices are Drifting Lower
While gold prices are in the process of breaking out, crude oil prices appear to be trending lower. Since hitting their highs in March 2022 above $129 per barrel, prices have tumbled 36% to nearly $82 per barrel (see the chart of Brent). The declining trend in Brent has occurred because of several factors.
Chinese Demand
The COVID-19 lockdowns in China due to the zero-COVID policy likely reduced demand by more than 550,000 barrels a day in 2022. In late November, Chinese COVID-19 cases surged to fresh highs above 40K, according to the National Health Commission, which continued to constrict demand. The reversal of the zero-COVID policy will likely buoy oil demand. China has relaxed President Xi Jinping’s zero-Covid policy, including home quarantine.
The Chinese State Council says that individuals do not have to show proof of a negative test before entering most public places. This scenario is a complete relaxation recently implemented by cities including Beijing and Shanghai. If these new rules stay in place, Chinese oil demand should rise.
Production is Rising
OPEC’s crude oil production increased in December. According to Bloomberg, OPEC production increased by 150,000 barrels month over month. According to OPEC Monthly Report, OPEC’s crude oil production continues to lag its designated quotas and fell by 744,000 barrels per day in November.
U.S. oil production has also been rising after tumbling in the wake of the pandemic. U.S. oil production hit a record high near 13 million barrels a day (see chart) in 2019 and then fell dramatically in 2020 to below 10 million barrels daily. Investment in oil production declined as the lockdown persisted, but in 2021 production started to trend higher, continuing into 2022. Oil production in the United States has rebounded to 12.5 million barrels daily and is poised to test the 2019 highs.
Sentiment Drops as Rates Tighten
Higher production is not the only impetus that is weighing on oil prices. Investors are concerned that slower global growth with reducing oil demand. Global growth is expected to decline to 1.6%. According to investment bank JP Morgan, developed Market growth is forecast at 0.8%, while growth in the United States is estimated at 1%. Economic growth in the Eurozone is forecasted to rise by 0.2%, while China’s economy is forecast to grow by 4.0% in 2023. As of October 2022, the IMF saw global growth at 3.2%. A drop to 1.6% would reduce global growth by 50%.
The decline in forecasted global growth is based on expectations that central banks worldwide will continue to raise interest rates to fight inflation expectations. Higher rates will continue to erode sentiment and growth forecasts.
The Technicals
Due to higher production and perceived lower demand, Brent prices have been trending lower. The 50-day moving average crossed below the 200-day moving average in September 2022, which shows that a long-term downtrend is in place. While prices bounced in mid-December, positive momentum is decelerating as the MACD (moving average convergence divergence) has decreased after moving higher in December. Oil prices are capped near the 50-day moving average of $87, which appears to be short-term resistance.
Seasonally, there is no observable movement for Brent prices in January. During the last decade, Brent prices have been up 50% of the time, for an average gain of 0.9% (see chart).
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The Bottom Line
The upshot is that gold prices are making headway in January. The seasonal tendency of gold to rally in January appears to be underway. Gold prices have risen slightly more than 3% in the last two decades. A seasonal trend is a recognizable observable pattern that occurs every year. Over the past decade, gold prices have increased 80% of the time in January for an average gain of 4.1%. The rally in gold has come as the dollar has started to edge lower. After hitting a high in September, the dollar index has declined from about 114 to near 104. Since gold prices are quoted in the U.S. dollar, a decline in the greenback usually spurs a rally in gold prices.
The technical analysis scenario for gold prices is also positive. Momentum is moving higher, and upward trends are in place as moving averages point to higher prices.
While gold prices are rising, oil prices are retreating. Prices are now below the levels seen before the Russian attack on Ukraine. Oil production has increased in the United States and is moving back toward levels seen before the pandemic. While production is rising, perceived demand is declining. Global growth is expected to fall in 2023, putting downward pressure on Brent oil prices.
There continues to be fear that global growth will decline as central banks raise interest rates. Higher rates used to fend off inflation appear to be working in the energy space. As Brent oil prices drop, so do refined products such as gasoline and diesel fuel.
There is no observable seasonal trend for Brent prices in January. Additionally, the technicals are pointing to a downtrend. 2023 is starting on a good note for gold prices and a negative message for Brent oil prices.
