As the economy, moves into 2011, both gold and oil are expected to have their prices heavily influenced by Federal Reserve monetary policy. As the broader money supply continues to expand from quantitative easing, we are expecting to see commensurate increases in commodity products that are not subject to a technology-driven cost curve.
Gold Predictions
Gold and oil are very different in their investment characteristics since gold is purchased principally to hold as an inflation hedge and oil is purchased primarily for refinement into gasoline and other petroleum products. Typically, this makes oil much more subject to international political factors and global economic forces. However, Gold has taken a more prominent role over the last few years as it has become a de-facto ‘anchor’ currency that is value-constant against monetary fluctuations by central banks.
During the 1990’s, Gold prices did not even hold pace with the Consumer Price Index as market sentiment was tilted more toward stocks and the business sector. After the terrorist attacks of September 11th, gold regained some of its prominence, but it was the financial crisis of 2008 that brought Gold into the forefront. Over the last few years, gold prices have appreciated significantly faster than the CPI. This reflects a market sentiment that is anticipating large amounts of future inflation, and is seeking Gold as a place to hold value when paper currencies de-value.
In the 2010 forecast book, we forecasted a gold price of $1,211 by the end of the year. By the month of November, Gold has surpassed that price to close at $1,368. The most recent surge in gold prices has come from announcements of more quantitative easing by the Federal Reserve.
Because of continued quantitative easing, we expect to see the price of gold finish 2011 at $1,601 per ounce, reflecting a continued desire on the part of investors for a hedge against inflation. There is also a risk of steep price contraction with gold if economic fundamental stabilize more quickly than previously anticipated.
Another factor influencing price volatility for gold is the fact that it is not a production commodity and does not generate earnings or dividends. Since the value of gold is primarily driven by its speculative value to other investors, there is the potential for dramatic price swings if market sentiment experiences any abrupt changes. Historical economic cycles have seen price spikes in gold that rapidly retreated when investor confidence in the economy restored. Our estimate for 2011 is that the moderating effect of mid-term elections will help to stabilize political forces, but that a return to economic expansion will not transpire until after the year elapses.
Oil Predictions
Oil prices have been going through a period of very significant volatility over the last few years. In the months preceding the financial crisis, global demand for energy was perceived to be on a permanent upward trajectory. This drove a large degree of speculation on oil prices by investment fund managers. The resultant run-up in oil prices generated large profits for established oil companies, which drew a high degree of political pressure from the government.
As the financial collapse unfolded, it initiated a string of forced selling by investment funds to unwind their financial positions in oil contracts. This drove market prices down to levels similar to the year 2000. After oil prices bottomed, they have regressed toward their longer-term trajectory. As we moved into 2010, another major factor effecting energy policy emerged. This factor was a drilling ban in the Gulf of Mexico following the oil spill by British Petroleum. This drilling ban served to inflate market prices for oil and tilted the balance of production to Mexico, South America, Russia, and the Middle East. In the 2010 forecast book, we forecasted an oil price of $82.70 by the end of the year. In the month of November, the price for a barrel of light sweet crude oil reached $81.3, landing within 1.8% of our forecast for the year.
We used the same model to produce our 2011 price forecasts as in 2010. The price estimate per barrel of crude oil in 2011 is $105.27, reflecting continued monetary expansion by the Federal Reserve and a global price equilibrium of growing demand juxtaposed against a limited supply of proven crude oil reserves that can be harvested at a relatively low cost. If market prices continue to escalate, it will generate opportunities for opening up new wells for production that are not currently in use due to acquisition costs that exceed the market price. This phenomenon may help to constrain price growth in the future, as new supply comes on line to accommodate some of the increase in demand (Top image: Flickr | Wyatt Wellman).
The Jason Hartman Team
