Commodities: Oil Correction Likely; No Gold Bubble

The following was excerpted from Agile Investments' Monthly Market Review:

Energy continues to be the major story in the financial markets. Oil prices, which have just topped $125/barrel for the first time ever, have nearly doubled over the past year. The price of oil is clearly very stretched on a short-term basis. Oil is trading 35% above its 200-day moving average, which matches the largest upside deviation from its longer-term uptrend line since oil’s bull market began six years ago. Undoubtedly, a correction is looming (perhaps back to the $90-100 level?), but those looking for a major, sustained drop in the price of oil are likely to be disappointed. In inflation-adjusted terms, oil is now trading at the peak levels registered in the 1970s, so oil is unlikely to continue to soar from current price levels (absent the outbreak of war in the Middle East). However, we would not be looking for a major decline in energy prices, given inexorable demographic-driven demand trends and the inflationary monetary forces supporting commodity prices.

Since peaking above $1000/ounce in early March, gold prices have been in a corrective mode, consolidating the huge gains that have occurred since last summer, when the credit crisis engulfed the financial markets, the Fed began its aggressive easing campaign, and the U.S. dollar commenced another down leg. We reject the notion that gold has been in a “bubble” and a major multi-year peak has been established in gold prices. In any further correction that occurs, we expect gold to find good support in the $800 - $840 range. If gold does decline into the low $800s, we think that would be an attractive place to add to longer-term core positions. As the principal monetary commodity, gold should benefit from the efforts from the Federal Reserve and the federal government to inflate away the adverse consequences of the popped credit and real estate bubbles. Gold prices will also continue to be supported by the inflationary policies of anumber of overseas governments that maintain artificial pegs to the U.S. dollar, and therefore sponsor inflation in their own economies.

Comments

[maher:]

Oil is spiking due to the real potential of a naval blockade of Iran, and/or strikes on Iranian regime terrorist bases

2008 May 23 01:15 AM

[pharma:]

The US empire is a giant with clay feet is about to collapse.

How long will the rest of world sell to America goods for US peso?

2008 May 24 11:49 PM