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We are
entering a golden age in commodity prices. In the past two months, gold has
become much more precious as it surged more than $100 dollars and has topped
$800 an ounce for the first time since 1980. Crude oil has also skyrocketed
and is trading at peak levels of as high as $96 per barrel. Where do prices
go from here, Gold at $1000 per ounce and crude oil over $130? It's a real
possibility. Our economic reality is based on a slowing GDP of 4%,
unemployment creeping above 5%, and a dollar that continues to depreciate.
The US dollar index is trading below the critical level of 77, over a 4%
decline since the Federal Reserve began to cut rates in September. At the
same time oil prices have been soaring on the weakness of the dollar, as well
as continual threats to oil supplies from the Middle East. Quietly, however,
we have the Chinese who right about now are contemplating whether or not it
may be time to dump their large pile of US Treasuries and instead build up
their gold reserves. I believe this would ultimately kill the dollar. We are
living in some interesting times to say the least. Hold on, tight.....
It's
no surprise that gold and oil prices are trading at such historic levels not
seen in over 25 years, as the dollar continues to plummet. The housing bubble
has just begun as defaults on US sub-prime mortgages continue and
foreclosures are increasing throughout the nation. The Fed has shifted focus
from inflation to housing, and continues to weaken the dollar further as it
slashed rates another quarter point, to 4.50%. Meanwhile, commodities
continue to impose serious inflation concerns at these towering levels, and
global worries about terrorism and geo-political tensions continue to shadow
our economy. The word around the camp fire seems to be recession for 2008,
and that's being optimistic. Then there is China which is seriously
considering selling its US Treasuries, which are estimated at $1.3 trillion
dollars, if the US congress passes a bill that would impose a 20% tariff on
goods imported from China. The flight from the dollar would be catastrophic,
causing a ripple effect throughout all global markets. Add to that mix, Iran
which holds one of the largest oil reserves in the world, and who are also
threatening to shutdown their supply if the UN imposes sanctions due to their
relentless pursuit of a nuclear energy program. Iran accounts for about 5% of
global supply, about 4 million barrels of crude which they ship all around
the world, except here in the U.S. The oil war game that is going on with
Iran is leaving the US economy vulnerable with the ever increasing shocks in
energy prices. They have undoubtedly added to the overall price of crude oil
everywhere. If things were to escalate through military intervention and Iran
shutdown production completely, oil prices would most likely reach $130 per
barrel. But that maybe the least of our problems as Russia, China, and some
of Europe have built strong relations with Iran and are big consumers of
their oil. They would most likely oppose any efforts other than diplomacy,
which has so far been ineffective.
Today's
historic levels in gold and oil are therefore not the result of mere
speculation. There are solid fundamental reasons behind it all. Record demand
for oil from the likes of China will only increase in the years to come.
Continuing threats to the supply of oil from Iran, or even from Nigeria,
where pipelines are constantly being blown up and kidnappings on oil workers
run rampant, will only further curtail oil production. The higher levels in
oil will also increase prices in gold as it always moves in line with oil
prices. A weakening dollar pressured by surging commodity prices will continue
to have more investors hedging against inflation. So, it seems very likely
that gold could soon be at $1000 an ounce. Many argue that the gold prices
have not run away in real terms as much as people perceive. After adjusting
inflation, gold prices would have to surpass $2000 an ounce to break the
record of $850 an ounce, set in January 1980. Ironically, there are many
similarities between the factors that propelled oil and gold prices back
then, like the oil embargo and high inflation. So, the overall outlook then
is still the same. Although there will be plenty of volatility in the markets
in the months to come, opportunities will also arise for the savvy investor.
Strong demand for this sector will continue to increase. I believe a
weakening dollar, high oil prices, and continual global tensions will only
push gold and oil prices much, much higher. I believe that looking ahead to
2008, gold and energy prices will continue to make headlines and should
certainly have a place in your portfolio. 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 me at oliver@wisdomfinancialinc.com.
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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