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A Bunch of Bull

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.


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.


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.


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.


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.

If you would like more information about the strategies we're using to participate in the commodity bull market please sign up here or email oliver@wisdomfinancialinc.com.


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