By William Patalon III
Executive Editor
Money Morning/The Money Map Report
Gold could reach $1,500 an ounce, since the worldwide plans to bail out the global financial industry are certain to fuel inflation, analysts led by Francisco Blanch at Merrill Lynch & Co. Inc. (MER) wrote in a research report.
The Merrill Lynch analysts also predicted that oil would reach $150 a barrel.
In the research note released earlier this week, the analysts said “the unintended consequence of the ongoing financial bailout will be inflationary pressures to the commodity markets.”
The analysts provided no timetable for their predictions.
The $700 billion U.S. bailout – plus the billions of dollars in capital infusions that have been put in place by governments and central banks all over the world – will be highly inflationary, analysts say. Historically, this type of move has been very bad for the U.S. dollar and highly bullish for oil prices.
“This is a very interesting projection,” said Money Morning Investment Director Keith Fitz-Gerald. “I have no idea what they’re basing their numbers on. But I certainly wouldn’t dismiss it based on everything I know about global trends, and my own proprietary calculations – which continue to suggest far higher prices for oil and hard assets than even Merrill is predicting.”
While Fitz-Gerald said that doesn’t mean there won’t be a continued near-term drop in gold and oil prices, he continues to believe the long-term outlook is for much-higher prices.
Currently, Fitz-Gerald has a multi-year target price of $225 a barrel for oil prices.
Typically, Fitz-Gerald says, analysts put a more-specific timetable on such predictions. But the unprecedented worldwide capital infusions that are part and parcel of the central banks’ bailout plans are dramatically skewing what are normally relatively predictable calculations, he said.
Since peaking at an all-time record of $1,032 an ounce on St. Patrick’s Day, gold has seen its price skid about 19%. Gold futures tumbled more than 4% yesterday (Thursday) to their lowest level in a month, as nervous investors sold futures contracts to raise cash, Marketwatch reported. Gold for December delivery fell $34.50, or 4.1%, to end at $804.50 an ounce on the Comex division of the New York Mercantile Exchange (CME), the lowest closing level since Sept. 17. Earlier, it had fallen more than 5% to $791 an ounce.
Some hedge funds were forced to liquidate their positions to cover losses in stocks and other markets, economists at research firm Action Economics told MarketWatch.
"For the moment, the weight of the deep funk felt in the global markets is keeping gold on the defensive, while would-be buyers ... find more comfort sitting on the piles of cash," Jon Nadler, a senior analyst at Kitco Bullion Dealers, told the financial news service.
Crude oil fell below $70 a barrel, reaching its lowest level since June 2007, and gasoline prices tumbled after a U.S. Department of Energy report showed that stockpiles advanced twice as much as forecast, Bloomberg News reported.
Crude oil for November delivery fell $4.37 a barrel, or 5.9%, to reach $70.17 a barrel, at midday yesterday on the NYMEX. The “black gold” fell as low as $68.57 a barrel, the lowest since June 27 of last year. Prices are down 20% from a year ago. Crude oil peaked at $147.27 on July 11.
Oil prices also dropped on doubts that the bank rescue plan will bolster global economic growth – and with it, fuel use. The Organization of the Petroleum Exporting Countries (OPEC) moved the meeting it had planned for November up to Oct. 24 after the oil-price decline.
“The DOE numbers just added to the downward pressure on the oil market,” Brad Samples, a commodity analyst for Summit Energy Inc. in Louisville, K.Y., told Bloomberg. “The weak economy is translating into rising inventories because nobody wants to burn the stuff.”
Money Morning Contributing Editor Martin Hutchinson – who last October correctly predicted that gold would make a run for record highs – this spring said that gold could reach $1,500 an ounce. At the time, Hutchinson listed three factors, one of which – related to the bailout plans – has moved front and center:
- Monetary policy: More than for any other investment, gold’s price depends primarily on the world’s monetary policy. When monetary policy is loose, as it was in the 1970s, gold prices soar. When it is tight, as in the 1980s, prices decline sharply. With the global bailout in place, monetary policy is about as loose as it’s ever been.
- Global Supply and Demand: For most commodities, price rises have an effect on supply and demand; a higher price increases supply and reduces demand, in "price elasticity." With oil, for example, a 10% rise in price reduces demand by about 1% to 1.5%, meaning that oil has a price elasticity of 0.1 to 0.15. But oil is priced in dollars, and when the dollar drops, OPEC tends to boost oil prices to keep its revenue steady. The flood of dollars the global bailout plans are going to send washing through the financial system won’t be good for the greenback – meaning the dollar-based price of oil can only go higher. That will more than offset any decline in demand in the near term; in the long run, growing economies in such markets as China, India and other emergent markets will create millions of new consumers who will demand luxuries ranging from jewelry to automobiles.
The upshot: Global demand for oil and gold will escalate – as will their prices.
- Comparison with past peaks: If gold had increased in price since 1997 by the same percentage as world dollar reserves, it would currently be trading at around $1,280 per ounce, Hutchinson says. And the current speculative appeal of gold, compared to its inactivity 10 years ago, suggests it could go higher than this: The 1980 gold price peak of $875 per ounce intraday is equivalent to more than $2,200 per ounce when inflation is taken into account, he said recently.
Commenting on Merrill Lynch’s gold-and-oil predictions, Dividend.com analysts Tom Reese and Paul Rubillo, this week wrote that “we think the Merrill call is based on solid reasoning, but we'll wait and see if the market agrees. So far during the meltdown, gold has shown flashes of running but has not broken out.”
They said that the “obvious trade on paper [which isn’t] so obvious to the market at this point” is Newmont Mining Corp. (NEM), which is “sitting just above a 52-week low.” Newmont’s shares, which closed yesterday at $28.85 each, have traded between $27.25 and $57.55 in the last 12 months.
News and Related Story Notes:
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MarketWatch.com:
Gold Could Hit $1,500, say Merrill Analysts. -
Forbes:
Pepsi Loses Fizz; Merrill Sees $1,500 Gold. -
Money Morning Commodities Investing Series:
Cashing in on Commodities: Will Gold Hit $1,500 an Ounce? -
Money Morning Special Investment Report:
Six Ways to Play Money Morning’s Prediction That Gold is Headed for $1,500 an Ounce. -
Bloomberg News:
Crude Oil Drops Below $70 After U.S. Reports Inventory Gain. -
MarketWatch.com:
Gold falls to one-month low as investors seek cash. -
Money Morning Market Analysis:
Oil Slides to New 13-Month Low Increasing Chances of an OPEC Cut. -
Money Morning Market Analysis:
The Five Top Plays to Profit from the Gold Boom.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.