Which Way for the Prices of Oil and Gold?

The year-end version of the "Guess the Price of Oil and Gold" contest is setting up to be quite a thriller and market analysts are providing no clear direction of what to expect as seen in these Bloomberg Video summaries from Monday.
Last week, Goldman Sachs said we should be at $150 a barrel by the end of the year and others see a hasty retreat to the $80-$90 level, now seen as something of a floor under the current price based on marginal production costs.

As for the price of gold, extrapolating from the current correction leads some to think that we're headed back into the mid-to-low $800 range with perhaps somewhere in the $700s the more likely destination.

Meanwhile, calls for a year-end price of $1,200 or more are now routinely heard given the amount of monetary and fiscal stimulus that looks to be required to prevent the U.S. economy and financial markets from spiraling downward anew.

Entries will open for the year-end oil and gold contest sometime in September.

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UPDATE - Aug 4th, 2008 - 1:30 PM

Forgot to include this outlook from Deutsche Bank via the Telegraph:

Deutsche Bank has called the top of the commodity cycle. The uber-bulls of the oil, food and metals boom have advised clients to take profits before the downturn engulfing most of the global economy works its inevitable effects.

Oil will slide back towards its "marginal production cost" of $60 to $80 a barrel; gold will slump to $650 an ounce as the dollar recovers against the euro; copper, lead and tin will slowly halve in price; grains will calm down as harvests in Australia and the Eurasian Steppe return to normal.

 

Comments

[petervankan]

Given the numbers of dollars that the US economy needs to survive, how will the dollar rise against the euro ? I can't see it heppening.

[longoil]

Deutsche Bank seems to be contradicting itself. In a recent article on the Motley Fool website dated Jun 27, 2008, their chief economist was quoted as saying oil prices will be stable at $120, not drop to $60 / barrel.

"Ahead of the Bell: Deutsche Bank boosts oil target

An economist with Deutsche Bank raised his crude price outlook Friday, prompting revisions to price targets on some of the world's largest oil companies.

Adam Sieminski, chief energy economist for Deutsche Bank, now expects crude prices around the $120 per barrel mark for the next two years, and prices to stabilize around $100 per barrel by 2010.

The new estimates are due to a delayed reaction of worldwide supply-and-demand elasticities to high prices, and the jump in exploration and development costs, the bank said."

As far as economists go, I would bet on CIBC chief economist and strategist, Jeff Rubin projection of $200 oil by 2010. His reports are always well researched and referenced and he has been consistently correctly in the past.

[JasonC]

Petervankan - go to Fred II and look up the M1 series. That is the narrow money supply the Fed directly controls through the size of its own balance sheet - banks only have fractional reserve requirements against M1 categories, not against the broader measures that include savings rather than transactions accounts.

And it hasn't moved an inch since the spring of 2005.

That's right Virginia, this oh so accomodative Fed hasn't expanded its balance sheet since the start of its tightening cycle, that broke the real estate bubble.

The whole drop in rates over the last year only kept the money supply from contracting rapidly, as commercial paper ran off at trillion a year annual rates. Yes the Fed extended all sorts of accomodation to the banks. But it sold treasuries into the market dollar for dollar as it did so. It's total balance sheet is no bigger today than this time last year.

The dollar was oversold on financial meltdown fears, and it has been moving higher since Bear Stearns day. Up 8% vs the Yen. Gold has been falling at a double digit annual rate since then. Oil had a speculative blow off as it decoupled from the dollar, but there was no way to sustain such high prices. There aren't more dollar chasing the same amount of oil - there was just overpriced oil smashing demand to atoms. So it is coming back down.

The people who believe we are in some epic inflation are ideologues, not empirical, and looking in a rear view mirror. The banks are reining in their lending as hard as they can, forcing strong cash flows in their own direction instead of supplying the world with more cash. And that cash flow is disappearing, into loss reserves and balance sheet shrinkage. M2 has been contracting outright since March.

It's deflation, not inflation.

[Kelly Lieberman]

Deutsche hides its own books as well as the other's... What's it's play here???

[paultaut]

Jason, go to Barrons.com, Market Lab, Monetary stats.

Internally, there is a major contraction, deflationary forces at work from Wealth Destruction across the financial spectrum. This is Capital Destruction at work and both Fed and Treasury are creating fiat money as fast as they can but have not as yet been able to stem the tide.

Now, take the year over year change in Foreign Debt.
The increase there is astounding, an increase of about 17% or $357 Billion more dollars shloshing about than there was a year ago. This cannot be sustained indefinitely.

This is the true representation of the increase in money supply. Our internals just show the inability of the Fed to pump in enough, fast enough.

[chux08]

"It's deflation, not inflation."


from the latest Casey Report:

"Inflationary or deflationary? A deflationary depression would resemble the worldwide troubles of the 1930s, characterized by falling prices. An inflationary depression would resemble that of Germany in the early 1920s or Zimbabwe today, characterized by soaring prices."


I'm guessing the soaring prices model to be in vogue here...
Doug Casey (and many others), whom I respect both because he's died in the wool Austrian economistic in his political and economical views and he's been dead right so far, states there won't be deflation. He mentions numerous reasons why and is flawless in his writings stating with much logic why that will be so. Enough so that I also remain convinced that inflation will be the real problem and I'm making my needed financial adjustments as such.
I'd suggest reading his views, comments as well as his recommendations. The commentary alone is well worth the price of a subscription...

caseyresearch.com/

[chux08]

"Deutsche Bank has called the top of the commodity cycle. The uber-bulls of the oil, food and metals boom have advised clients to take profits before the downturn engulfing most of the global economy works its inevitable effects.

Oil will slide back towards its "marginal production cost" of $60 to $80 a barrel; gold will slump to $650 an ounce as the dollar recovers against the euro; copper, lead and tin will slowly halve in price; grains will calm down as harvests in Australia and the Eurasian Steppe return to normal."


This is unrealistic double talk given by an institution that specializes in such...
Talk is cheap! And that's all this is. It wouldn't surprise me if this was just the public stance and then in reality they're (still) ALL IN on the present "commodity super-cycle" and if they're not, then they deserve to go under/away. I'd no more believe this part of the article than to say that today isn't an EXCELLENT day in which to purchase some gold due to falling gold prices.
Gold as a commodity?? Only in America...
Repeat after me: NOTHING HAS CHANGED. GOLD IS REAL MONEY, GOLD IS REAL MONEY, gold is REAL money and the time to buy some is NOW. Wow! Sub $900 gold. And when I happen to have some paper money to convert, to boot!!! What a great day and a GOLDEN OPPORTUNITY...

[CLH]

I totally agree with the Deutsche Bank--- although oil may go to $50. Their estimate on gold looks good.

[arwerth]

how long before opec anounce production cuts.(we need to keep it for our children said the saudi oil minister)amhedinajad test fires some more missiles.or reveals his enriched uranium.the arabs use their dollar mountain to go long oil.enjoy the suckers rally.loads of good news expected.on the us economy.!!!!.hedge your oil for the future at 115 and dont look back

[Jake2]

It is impossible to ignore the recent precipitous drops in oil . . . and gold.

[MNSL]

You are right. This is an excellent article. Now it is time to leave the commodity mareket. Very soon inflation will come down. Some companies, sectors and industries will benefit most.