Why Oil and Gold Are Headed Much Higher

by: NuWire Investor October 19, 2008 | about stocks: DBO / DIG / DTO / DUG / GLD / GOLD / NEM    

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Analysts led by Francisco Blanch at Merrill Lynch & Co. Inc. wrote in a research report that gold could reach $1,500 an ounce. They also predicted that oil would reach $150 a barrel.

In the research note released earlier this week, the analysts said “the unintended consequence of the ongoing financial bailout will be inflationary pressures to the commodity markets.”

The analysts provided no timetable for their predictions.

The $700 billion U.S. bailout—plus the billions of dollars in capital infusions that have been put in place by governments and central banks all over the world—will be highly inflationary, analysts say. Historically, this type of move has been very bad for the U.S. dollar and highly bullish for oil prices.

“This is a very interesting projection,” said Money Morning Investment Director Keith Fitz-Gerald. “I have no idea what they’re basing their numbers on. But I certainly wouldn’t dismiss it based on everything I know about global trends, and my own proprietary calculations—which continue to suggest far higher prices for oil and hard assets than even Merrill is predicting.”

While Fitz-Gerald said that doesn’t mean there won’t be a continued near-term drop in gold and oil prices, he continues to believe the long-term outlook is for much-higher prices.

Currently, Fitz-Gerald has a multi-year target price of $225 a barrel for oil prices.

Typically, Fitz-Gerald says analysts put a more-specific timetable on such predictions. But the unprecedented worldwide capital infusions that are part and parcel of the central banks’ bailout plans are dramatically skewing what are normally relatively predictable calculations, he said.

Since peaking at an all-time record of $1,032 an ounce on St. Patrick’s Day, gold has seen its price skid about 19 percent. Gold futures tumbled more than 4 percent Thursday to their lowest level in a month, as nervous investors sold futures contracts to raise cash, Marketwatch reported. Gold for December delivery fell $34.50, or 4.1 percent, to end at $804.50 an ounce on the Comex division of the New York Mercantile Exchange, the lowest closing level since Sept. 17. Earlier, it had fallen more than 5 percent to $791 an ounce.

Some hedge funds were forced to liquidate their positions to cover losses in stocks and other markets, economists at research firm Action Economics told MarketWatch.

"For the moment, the weight of the deep funk felt in the global markets is keeping gold on the defensive, while would-be buyers...find more comfort sitting on the piles of cash," Jon Nadler, a senior analyst at Kitco Bullion Dealers, told the financial news service.

Crude oil fell below $70 a barrel, reaching its lowest level since June 2007, and gasoline prices tumbled after a U.S. Department of Energy report showed that stockpiles advanced twice as much as forecast, Bloomberg News reported.

Crude oil for November delivery fell $4.37 a barrel, or 5.9 percent, to reach $70.17 a barrel, at midday Thursday on the NYMEX. The “black gold” fell as low as $68.57 a barrel, the lowest since June 27 of last year. Prices are down 20 percent from a year ago. Crude oil peaked at $147.27 on July 11.

Oil prices also dropped on doubts that the bank rescue plan will bolster global economic growth—and with it, fuel use. The Organization of the Petroleum Exporting Countries (OPEC) moved the meeting it had planned for November up to Oct. 24 after the oil-price decline.

“The DOE numbers just added to the downward pressure on the oil market,” Brad Samples, a commodity analyst for Summit Energy Inc. in Louisville, K.Y., told Bloomberg. “The weak economy is translating into rising inventories because nobody wants to burn the stuff.”

Money Morning Contributing Editor Martin Hutchinson—who last October correctly predicted that gold would make a run for record highs—said this spring that gold could reach $1,500 an ounce. At the time, Hutchinson listed three factors, one of which—related to the bailout plans—has moved front and center:

  • Monetary policy: More than for any other investment, gold’s price depends primarily on the world’s monetary policy. When monetary policy is loose, as it was in the 1970s, gold prices soar. When it is tight, as in the 1980s, prices decline sharply. With the global bailout in place, monetary policy is about as loose as it’s ever been.
  • Global Supply and Demand: For most commodities, price rises have an effect on supply and demand; a higher price increases supply and reduces demand, as in "price elasticity." With oil, for example, a 10 percent rise in price reduces demand by about 1 percent to 1.5 percent, meaning that oil has a price elasticity of 0.1 to 0.15.  But oil is priced in dollars, and when the dollar drops, OPEC tends to boost oil prices to keep its revenue steady. The flood of dollars the global bailout plans are going to send washing through the financial system won’t be good for the greenback, meaning the dollar-based price of oil can only go higher. That will more than offset any decline in demand in the near term; in the long run, growing economies in such markets as China, India and other emergent markets will create millions of new consumers who will demand luxuries ranging from jewelry to automobiles.

The upshot: Global demand for oil and gold will escalate—as will their prices.

  • Comparison with past peaks: If gold had increased in price since 1997 by the same percentage as world dollar reserves, it would currently be trading at around $1,280 per ounce, Hutchinson says. And the current speculative appeal of gold, compared to its inactivity 10 years ago, suggests it could go higher than this: The 1980 gold price peak of $875 per ounce intraday is equivalent to more than $2,200 per ounce when inflation is taken into account.

Commenting on Merrill Lynch’s gold-and-oil predictions, Dividend.com analysts Tom Reese and Paul Rubillo, last week wrote that “we think the Merrill call is based on solid reasoning, but we’ll wait and see if the market agrees. So far during the meltdown, gold has shown flashes of running but has not broken out.”

They said that the “obvious trade on paper [which isn’t] so obvious to the market at this point” is Newmont Mining Corp. (NEM), which is “sitting just above a 52-week low.” Newmont’s shares, which closed Thursday at $28.85 each, have traded between $27.25 and $57.55 in the last 12 months.

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This article has 142 comments:

  •  
    Oct 19 07:38 PM
    225 a barrel is a little high.
    Reply | Link to Comment
  •  
    Oct 19 08:46 PM
    Personally I think Gold has had it's chance to prove these lofty predictions. All the reasons for gold to be making new highs everyday are already here. The fact it is falling tells me the days above 1000 may not come again for some time. You can always make excuses as to why it's moving in either direction but the tape doesn't lie.
    Reply | Link to Comment
  •  
    Oct 19 09:59 PM
    The dollar is still headed up meaning gold will continue weak.
    Reply | Link to Comment
  •  
    Oct 19 10:08 PM
    Gold price action is surprising. Deleveraging of hedge funds is plausible explanation but can not explain it all especially with such huge amount of money on the sidelines. Central banks are selling- but rationing it out- mints are out- hard to explain that either. Another conundrum I guess.

    I am holding my position – will accumulate if it falls further.
    Reply | Link to Comment
  •  
    Oct 19 10:14 PM
    Gold maybe-- oil not a chance. Global demand destruction is here to stay for at least 2 years as all growth in recent times has been due to emerging markets where are clearly not going to be growing at prior rates and will likely be in recession in short order.
    Reply | Link to Comment
  •  
    Oct 19 10:37 PM
    Gold ? For 40 years we have been hearing about the boundless upward potential price of gold ..Like a broken watch, gold moves up then settles back down into its usual comatose state.
    Gold is a relic and has no place in an investment portfilio (contrary to the talking heads touting gold ad nauseum) .Look at gold stocks which are at their lows ...Proof positive !
    Commodities yes, oil drilling services yes, FCX yes, MMR yes, NOV yes, PBR yes, COP yes, ACI, BTU yes yes yes...Gold: never happen to any lasting, meaningful degree...
    Reply | Link to Comment
  •  
    Oct 19 10:48 PM
    capital pains I think has got it straight. I can see accumulating energy stocks with a great dividend or USO but IMHO accumulating gold or gold stocks is a traders game not an investment.
    Reply | Link to Comment
  •  
    Oct 19 10:56 PM
    Just do not chase after the past performance. And GS analysts predicted the oil price to rise to $200 per barrel... Look where the prediction went. I do not trust the rating agencies and the Wall Street analysts estimates any longer. They need to do more diligence to do their jobs.
    Reply | Link to Comment
  •  
    Oct 19 11:33 PM
    The authors comment, citing an analyst that gold would be $2200 inflation adjusted is based on published reported Government inflation data.
    Real inflation over the last 25 years is likely 2-3 times higher, based on shadowstats.com, and global monetary growth.

    Thus, by my back of the envelope calculations, gold has quite a bit of catch up to do, and in real inflation terms, (not bogus government data) the price should be headed to north of $3500 per ounce.

    Moreover, gold is perhaps the single most manipulated commodity by governments worldwide.

    It is always in the interests of the gov. to encourage gold leasing, gold paper contracts short sales, and falsifying government reserve holdings.
    Considerable evidence has been published to show this is exactly what is happening.

    As the world comes to a new era of the unwinding of the great credit bubble of 1983 to 2008--metals and commodities will be primary beneficiaries.

    In the short term, (two years) gold and other commodities may fall another 20%--but the bull market is intact for commodities, and gold.

    Full disclosure: I don't own a concrete bunker, nor so I stockpile bottled water, ammunition, and old Soldiers of Fortune magazines.
    Reply | Link to Comment
  •  
    Oct 19 11:41 PM
    Capital Pains,

    40 years ago, gold was $35 / oz. It is now $800 / oz (average of 8% / year gain). Perhaps you've been hearing about the gold price having boundless upward potential because it actually has boundless potential. In reality of coarse, it is just the dollar that has boundless debasement potential.
    Reply | Link to Comment
  •  
    Oct 19 11:53 PM
    What's to prevent upgraded cartel of U.S. and Euro-Zone bankers now cooperating under USTreasury support from continuing to sell short unlimited contracts to cap prices, and settle with $$ from Ben & Hanky's presto print instead of physical metal? What prevents the cartel or USTreasury interests from buying up large chunks production mining at depressed prices and limiting or controlling physical supply? It would seem the world market could be almost reduced to non-existence indefinitely, while the globalist elite continue to rake in physical metal that becomes available on the cheap! Please enlighten if possible.
    Reply | Link to Comment
  •  
    Oct 20 03:35 AM
    Gold is hated by parisites.
    Reply | Link to Comment
  •  
    Oct 20 04:50 AM
    Good luck trying to buy the physical bullion on the street at the comex futures prices. The physical is out of stock. Someone's gaming the prices and it won't work for too long. The amount of liquidity unleashed by the Central Banks worldwide is unprecedented and consequently, gold has only one to way to go - UP. Now it's only a matter of waiting out all the hedgies - who are getting margin called left and right out of their desired gold positions.

    Oil's headed up too. You have got to balance demand destruction with peak oil. The Iran premium has completely dissipated in this latest purge. Boy! Those Straits of Hormuz are pretty narrow!!
    Reply | Link to Comment
  •  
    Oct 20 06:04 AM
    this is a poa prediction. there are fundamentals which can either depress or inflate the prices of gold and oil - depending how the shoes fall in the future.
    Reply | Link to Comment
  •  
    Oct 20 07:54 AM
    THE BOTTOM IS NOT IN . It is a trading environment with a relief rally. However, the relief rally is not even in place yet.
    Reply | Link to Comment
  •  
    Oct 20 08:41 AM
    Well another day another ounce of gold to buy. In just a few short months all that injected money will be filtering into every nook and cranny - Then the price of Gold and Silver will blind everyone looking for this old relic to be passa. Silver will be the most aggressive with such a shortage. What? Don't belive me. Go anywhere and check on getting physical and you WILL pay super high periums or just not get any at all. Gold too. Geezzzz... With this type of action in fraud I bet the Mob is wondering why they did not think it up or get in on the action years ago.
    No paper for me just a 100toz or Comex 1000toz bar only - Thank You Very Much. When the ones on here that read this do not own any of either are crying I really, really do not want to hear you complain or even whine. You had a chance now before it just blows up like a bomb to get some and then you will just be wondering how to buy groceries and pay for bills. I on the other hand will be able to take a vacation away from all the ones that are asking if I can spare a Silver dime....
    Good Luck and remember for over 2000 years gold and silver was money what has changed - Only the printing of paper money that has NEVER lated in those same 2000+ years.

    Good To All..
    (Got Gold/Silver?)
    Reply | Link to Comment
  •  
    Oct 20 08:46 AM
    what about DEFLATION? OIl might hit 15 before it hits 150...and gold....300...risky stuff
    Reply | Link to Comment
  •  
    Oct 20 09:50 AM
    shhhh.. maybe they havent figured this out yet
    Reply | Link to Comment
  •  
    Oct 20 10:29 AM
    "Turn thosee machines back on!"

    They were bubbles, they've burst, they aren't coming back. No amount of spin can revive them.
    Reply | Link to Comment
  •  
    Oct 20 10:34 AM
    While we can agree that demand destruction is occurring, do you know that supply destruction is also occurring? Look at the press releases concerning cutbacks in drilling budgets. This will start to crimp down on the amount of new production. Then there's our old OPEC buddies. They will be shutting down production. So as these things go through, you'll probably see supply drop as fast as demand, keeping the market balance pretty tight. At $50/bo, drilling in Canadian oil sands and deepwater GOM comes to a stop. While we may see a short term price drop, in a year or so, our production will be very very low and at low prices, our consumption will start to grow again. Hence, you'll see $4 gasoline pretty soon. Maybe during 2009!
    Reply | Link to Comment
  •  
    Oct 20 10:55 AM
    oh don't start this again, all u oil speculators got burnt, and iran isn't happy either if it goes under 70 a barrel,,,,we've been scammed all summer long with BS stories lies of supply & demand and hopes of hurricanes creating havoc so u can blame it on that..than jack the price up when in honesty the oil we were buying back than had the same value as now except someone was getting rich.. we've had enough of it and hopefully it gets bashed under 50 a barrel..good luck with that 225 price tag,,,we'll keep saying normal prices fitzegarld should taste his own medicine and buy it for 225 im sure he can afford it crooks
    Reply | Link to Comment
  •  
    Oct 20 11:24 AM
    Gee! Makes a $150 oil and $1500 gold prediction and there is no timetable. Ok, I can play that game - Someday Oil will be $1,000,000 a barrel. Could be in 2400 or next year. Hey, what the hell!
    Reply | Link to Comment
  •  
    Oct 20 11:26 AM
    NuWire started operations recently, has no credentials and is tossing out articles in the hope that some of them will prove to be correct in order to gain a following. This type of enticement may lead to advertising on its site and therefore, income.

    That being said, what is New in this article?

    Reply | Link to Comment
  •  
    Oct 20 01:50 PM
    $225, ya right.
    Reply | Link to Comment
  •  
    Oct 20 02:04 PM
    This whole article seems counter-intuitive. There is a global recession coming. The largest consumer of Hydrocarbons in the World i.e USA, is going to have a significant long drawn recession and readjustment period - stimulii aside. China ain't growing as much as it did before the Olympics. India has already slowed down due to its trigger-finger (former) Gov. of its Central bank. And Eurozone and Japan seemed to have entered a perinial slowdown with a quarter or two of recession here and a growth uptick there. Yes Gold is a currency but eventually there aint much of it and those who have it dont know where to shove that piece of metal. As for Opec - cut they might - that will only add to demand destruction globally considering USD will remain strong and since Crude is price in Oil world wide, most economies which anchor their currency to a large dollar pool will suffer the most. Like emerging economies.

    I dont get it when people just take flights of fantasy.
    Reply | Link to Comment
  •  
    Oct 20 03:52 PM
    --"When the ones on here that read this do not own any of either are crying I really, really do not want to hear you complain or even whine. You had a chance now before it just blows up like a bomb to get some and then you will just be wondering how to buy groceries and pay for bills."--

    Wow. Sounds just like every other bubble blowhard. If I had a double eagle for every time I heard a realtor tell me "buy now or be priced out forever!!!" The problem with being an extremist is you end up looking just like your enemies. I'm sure you're one of those who was beating up on real estate bubble cheerleaders, but you failed to see the pom poms you're shaking.

    --"I on the other hand will be able to take a vacation away from all the ones that are asking if I can spare a Silver dime...."--

    Good luck with that strategy. Even if you're right you're going to find out quite rudely why your precious metals are spendable in a Mad Max economy exactly once. Once and only once. After that, everyone will know you've got it, and trust me, guys like you and I who post on SeekingAlpha are not going to be the sort who can hold onto their gold against the sorts of Alpha-males who'll be running the show in your fanciful all-gold, barter economy.
    Reply | Link to Comment
  •  
    Oct 20 04:42 PM
    Great Post. IMO we will see the tables turn once we regain equilibrium to seeing higher commodity prices. Let's face it.
    1) Massive increase in money supply
    +
    2) Lowered interest rates
    =
    3) Increased inflationary pressures.

    = investors running to gold and oil as a safe haven.
    Reply | Link to Comment
  •  
    Oct 20 04:46 PM
    In the choice between oil and gold, oil wins. While holding stocks in the oil patch, you are rewarded with fat dividends. While holding physical gold there is no income and gold stocks are not high dividend payers.
    Reply | Link to Comment
  •  
    Oct 20 04:49 PM
    I wan't sure what to do, but now that spackler predicts $1,000,000 oil by 2400 i'm jumping in.
    Reply | Link to Comment
  •  
    Oct 20 05:57 PM
    From its current level of around $800 per ounce, gold will be $86,155,314 per ounce in the year 2400. That assumes a rather modest inflation rate of 3% per year for the next 392 years. Easily doable.
    Reply | Link to Comment
  •  
    Oct 20 09:07 PM
    I'm always reluctant to join a thread that's this long..and peopled by comments worthy of a failing 7th grader. Georealist will cut to the chase because cutting thru the idiocy would take a lifetime...
    Of course gold is going to $2,000 because the ability of the powers that be to inflate is virtually endless. That means US$ debasement. This recession will be unlike any other..President Obama will see we feel no pain...and WHATEVER number of programs or handouts it takes will materialize faster than you can say "Nancy Pelosi" three times.
    For those of you who don't get out much there is something called "Peak oil" lurking..and you are about to be bit. Below $70-80 NO NEW OIL gets produced..that is..explored for..developed..and drilled.
    Oil will be $125 before June of 2009...and recession or not they'll be killing for it..literally.
    Reply | Link to Comment
  •  
    Oct 20 11:53 PM
    hey georealist- i heard the circus is hiring clowns. that's where you should be jumping in.
    Reply | Link to Comment
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