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Understanding the Gold Market Reaction to the OPEC Output Cut


It was a classic case of misdirection. Harry Houdini and David Blaine couldn’t have done it any better. For the first time in 8 years, OPEC has announced an oil production cut after reaching a “surprise” agreement with Iran.

Markets did not expect it, not one bit. But consider this: When you control the world’s biggest oil cartel, every trade you make becomes a de facto insider trade. Nobody knows what goes on behind closed doors in OPEC meetings or between OPEC and Iran, and whatever makes it to the press you can be sure has been vetted and sterilized and calculated as to its effect on the relevant markets.

Given the negative news that was trickling out leading up to this surprise oil output cut, the bait and switch seems almost obvious now. How many shares of oil stocks did sovereign wealth funds with OPEC operators load up on as news downplaying the possibility of an oil output cut reverberated through the globe? We’ll never know, but it certainly sounds like a foolproof trading strategy, especially for a beleaguered Saudi kingdom cutting public salaries and going deeper and deeper into debt.

Practically, OPEC could continue pumping as much oil as it wants while making markets think it is cutting while not actually cutting in reality. Can the world really keep track of such things so accurately?

Speculations aside, it is interesting to note that oil was not the only commodity to shoot higher on the surprise announcement out of OPEC. The Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) indeed shot up on the news, 4.3% on the day. Gold stocks also lifted off, though an oil production cut certainly has no impact on the gold market. In fact, if anything, a cut on oil production should in theory make it more expensive to mine gold, which would be a negative for gold stocks. Nevertheless, the Market Vectors Gold Miners ETF (NYSEARCA:GDX) shot up just as well, even though gold itself didn’t really react very strongly and still closed down on the day.

The fact that mining stocks are strongly up on the day thanks to, at best, unrelated news about an oil production cut, with the SPDR Gold Trust (ETF) (NYSEARCA:GLD) flat suggests that the nascent gold bull is looking for its next excuse to trend higher after a brief pause since late June.

Disclosure: At time of writing, the author was long XLE and gold equities.

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