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Most have the
misconception that those who invest in gold are merely doomsayers waiting on
the next financial disaster. Today, they may very well seem as savvy investors.
Gold has risen more than 30% this year alone. It has outperformed nearly
every other asset class over the past several years. Today, gold is currently
trading around $800 an ounce which has more than tripled where it was at
nearly six years ago. The peak price of crude oil, the weakening dollar, to
the conventional Econ 101 imbalance of supply and demand have all put
pressure on the precious metal as it nears its all time high. Some analysts
believe gold will continue to shine and its next run could have it heading
towards $1000/ounce. I believe we are entering a new realm when it comes to
trading gold. I think one can expect plenty of volatility up ahead as gold
may range wildly, we have already seen $25 movements in a single day. It
would not surprise me to see $50, even maybe $100 days, as the precious metal
sets new all time highs and heads past $1000/oz.
OIL FACTOR
If I were to tell
you a couple of years ago that oil would be trading close to $100 per barrel,
not many would believe me. Today's economic reality has crude oil trading at
a peak record of $99 per barrel on speculation the dollar will decline
further, as well as concerns of a tight oil supply, and geopolitical tensions
that continue to shadow global markets. According to the latest available
data, on the New York Mercantile Exchange, crude for January delivery traded
at an all time high $99.29 a barrel. Heating oil also spiked and hit a record
of $2.6770 a gallon. Gasoline is also creeping up shy of $4.00 per gallon at
your local gas station. The effect of higher energy prices is being felt
worldwide and no remedy seems in sight as demand continues to grow rapidly
from the ever increasing development of China and India. Many investors
predict oil supplies will not be able to keep up with demand. The declining
US dollar and the possibility the FED may cut rates once again have also
fueled prices to reach such peak levels. Continual threats from Iran and
Venezuela, who control a large supply of the world's oil, indicate a new war
in the Middle East would more than double oil prices to over $200 per barrel.
That may seem outlandish, but so was $100 for a barrel of oil just a couple
of years ago.
WEAKENING DOLLAR
What is more
significant is the fact that a group of six oil producing Arab nations are
looking to change their fixed exchange rates from the US currency, this
according to reports from the associated press. Nations whose currencies are
tied to the US dollar are beginning to worry. Central banks are considering
taking flight from the weakening dollar and are looking to diversify into
other currencies like the euro and franc. China has also indicated it may
slow its accumulation of US dollars and instead diversify into gold. I
believe the loss of confidence in the dollar is the effect of the record
trade deficit, housing crisis, and credit crisis our economy is facing. The
prosperity of the past few years has been the direct result of cheap, easy
borrowing from consumers, home buyers, businesses, bankers, and the
government. In my opinion, we are in the beginning of a credit crunch and
housing crisis that is slowing our economy into a recession. Speculation that
the Fed will have to slash interest rates once again will only further
artificially inflate assets and send the dollar down the toilet. The dollar
has fallen to a record low against the euro, and in my opinion will be
trading soon at $1.50. There is concern that the dollars monopoly as the
world's dominant reserve currency is being seriously challenged. Today's weak
dollar reflects a period of diminished US political and economic hegemony.
Expect to see the dollar decline further. This will eventually increase US
exports as they will become relatively cheap, but it will come at the expense
of the US public's standard of living and the value of saving investments
globally.
SUPPLY/DEMAND
Consumption of
gold has been growing almost twice as fast as its production. Recent data
from the World Gold Council indicates that gold supply will not be able to
keep up with demand in coming years. The ascendance of China and India, have
shifted the curve of consumption demand drastically. Asia, which accounts for
almost three billion people, is leading the world in economic growth. These
new investors are now turning to gold as a safe haven against both economic
and political uncertainty. The demand for gold also comes as many central
banks have reduced their gold sales, and instead have begun to fill their
reserves with the precious metal due in large part to the weakening dollar.
The supply/demand imbalance is expected to continue largely due to the fallen
production from mining companies all around the world. Many metal mines will
not come to production for years, while strikes, stoppages, and a shortage of
mining equipment have all hampered world supply.
Conclusion
I believe we are
in the midst of a commodities boom which is being driven by the emerging
economies of China and India. The last bull market in commodities lasted
almost 15 years, roughly between 1965 through 1980. Then sugar prices exploded
from 1.4 cents/lb in 1966 to a whopping 66 cents/lb in 1974. Oil surged from
$2/ barrel in 1973 to over $30/barrel in 1980 and gold rose from $35/oz. in
1971 to over $850/oz. in 1980, as indicated by historical data on
commodities. In my opinion, this information suggests there's much more
fireworks up ahead for gold. All signs are also pointing to a slowdown in the
stock market. If copper prices are any indication of what direction the US
stock market and the economy are heading, then brace yourselves for a slow
down. Copper has been unable to gain even though precious metals such as gold
and silver have rallied. Market watchers know that the copper market can be
an early indicator for the direction of the US stock market and economy. We
have already begun to see sharp declines in the Dow Jones, which dropped to
well below 13,000. The prosperity of the last few years has distracted us
from the uncertainty we face today. The combination of a slowing US economy,
the surge in oil prices and the fall of the dollar maybe leading us into a
new gold rush.
Olivier Velasquez
Metals Market Strategist
Wisdom
Financial, Inc.
Direct toll free: 866-465-0017
International: 949-548-2021
Olivier Velasquez is
the Metals Market at Wisdom Financial. You can find out more about Mr.
Velasquez and his services at www.wisdomfinancilinc.com. . If you would like a free brochure on participating in
Gold and Oil Futures and more information on the strategies we're
implementing to participate in commodity trends please contact him at oliver@wisdomfinancialinc.comThe
risk of loss in trading commodity futures contracts can be substantial. You
should therefore carefully consider whether such trading is suitable for you
in light of your financial condition.
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