The problem is that higher fuel prices don’t just hurt when you fill the car. Australia moves an enormous amount of freight by road, while agriculture, construction, mining, aviation and logistics are all heavily exposed to fuel costs. When diesel and petrol rise, some of those additional costs eventually find their way into the price of goods and services, adding another layer to Australia’s already persistent inflation problem.
That makes the latest move in oil particularly uncomfortable for the Reserve Bank, which has been trying to push inflation lower through higher interest rates while expensive oil works in the opposite direction. Australians can cut discretionary spending when money gets tight, but businesses still need to move goods around the country, supermarkets still need deliveries and people still need to get to work.
Higher oil therefore has the potential to keep inflation elevated even while households are already feeling the effects of restrictive interest rates, making the RBA’s job considerably more difficult if energy prices remain around these levels.
Interestingly, the same situation is creating some competing forces for gold, which has now come back to test its 50-day moving average, an important technical level we’ve been watching closely over recent weeks. The price is currently sitting just above this level, but momentum has weakened considerably and the broader short-term technical picture remains under pressure.
The 50-day moving average is particularly important because it can act as a rough dividing line between shorter-term strength and weakness. Holding above it and beginning to move higher would give gold some breathing room, while a sustained move underneath it would suggest the recent downward pressure still has further to run.
Momentum indicators aren’t making the picture particularly comfortable either. RSI has been moving lower towards neutral territory, showing that some of the buying momentum behind gold‘s earlier move has disappeared. Combined with gold now pressing against its 50-day moving average, the metal appears to be sitting at something of a technical crossroads rather than showing a convincing recovery.
What makes the next move particularly interesting is the surge in oil because rapidly rising energy prices, geopolitical uncertainty and renewed inflation concerns can strengthen the longer-term argument for holding gold. There is another side to that equation, however, because if higher oil pushes inflation expectations higher, central banks may need to keep interest rates elevated for longer, or potentially raise them further.
Higher interest rates and bond yields can put pressure on gold because the metal itself doesn’t generate a yield, meaning the immediate impact of an oil-driven inflation shock isn’t necessarily positive for bullion. Rising oil prices can therefore increase longer-term concerns about inflation and economic stability while simultaneously creating short-term pressure through higher interest-rate expectations.
We now have two markets worth watching very closely, with oil above US$100 quickly becoming an Australian inflation story while petrol prices are already climbing before the full effect of the latest oil surge has necessarily reached the bowser. At the same time, gold is sitting just above its 50-day moving average with downward momentum building through its RSI.
If gold can hold this level while oil and inflation concerns continue building, it would be an encouraging technical sign. If the 50-day moving average gives way and momentum continues lower, gold could remain under considerable short-term pressure, making that little red 50-day moving average line we’ve been watching increasingly important over the coming sessions.
Gold and oil are often associated with inflation, but they don’t necessarily move in the same direction. When oil becomes significantly more expensive, businesses pay more for transport, freight, manufacturing and energy, with at least some of those additional costs eventually flowing through to consumers.
Historically, inflation uncertainty can increase interest in gold as a store of value, but central banks also respond to persistent inflation by increasing interest rates or keeping them higher for longer. This creates competition for gold because when government bonds and cash investments offer higher returns, holding an asset such as gold that doesn’t pay interest can become relatively less attractive.
Higher interest rates can also strengthen currencies such as the US dollar, creating another potential headwind for internationally priced gold. This is why an oil shock can initially put pressure on gold even though persistent inflation and economic uncertainty may eventually strengthen the longer-term argument for precious metals.
Right now, those competing forces are playing out at the same time, with oil above US$100 adding another layer to the inflation problem while gold is being tested around an important technical level. What happens around the 50-day moving average over the coming sessions should give us a much clearer indication of whether buyers are prepared to defend gold at current prices, or whether further weakness is developing.
Disclosure: This article is provided for general information and educational purposes only and does not constitute financial advice. Markets can move quickly and past performance is not a reliable indicator of future results. Always conduct your own research and consider your personal circumstances before making investment decisions.
