Oil Heading for $150 a Barrel, Gold for $1500 an Ounce - Merrill

by: William Patalon III October 17, 2008 | about stocks: NEM    

William Patalon III

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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. 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% 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, 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 Thursday 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 Thursday at $28.85 each, have traded between $27.25 and $57.55 in the last 12 months.

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This article has 28 comments:

  •  
    Oct 17 04:10 AM


    Many times Cheap can get cheaper?

    What do you think? With China down approx 69%..Fear and gloom in the markets..Jim Rogers being the biggest China Bull on Earth.... Do you think at a minimum the Chinese stock market can bounce... Is this a low risk trade? Is this a value trade? I am a member of Myinvestorsplace.com and am seriously concerned, Any suggestions?
    Reply | Link to Comment
  •  
    Oct 17 07:28 AM
    Best case scenario, the reinflation works, and the extra $3Trillion+ globally that has been thrown at the problem so far begins to stick. When Alt-A resets start to hit in Spring, another $3 Trillion gets thrown in for good measure. Massive global dilution is realized, and gold and oil rise together. Does anyone believe that the same central bankers who brought us this mess will be able to contain the inflation when it hits?

    Worst case scenario, the reinflation fails, banks and nations fail (along with their fiat currency systems) and owning hard assets will make it possible to move some of your wealth intact into the next corrupt, manipulated central bank system which is also destined to fail.

    Even those who DO study history are doomed to repeat it.
    Reply | Link to Comment
  •  
    Oct 17 07:51 AM
    Step back and look at the basics. Everybody everywhere is cutting back. Jason Schwartz was probably right about $30 oil coming. (At least before $150 oil)....
    Reply | Link to Comment
  •  
    Oct 17 09:10 AM
    Bottom line: Do you believe the Banksters and their overpaid hucksters? Do you believe that Daddy (BushCo) is omniscient and will protect and care for you? (if you're not one of his "base") Are you blinded by sentimental nationalistic patriotism? (rah rah rah sis boom bah!) Are you a believer? Are you willing to gamble your family's future on faith based tinkle down economics?
    Reply | Link to Comment
  •  
    Oct 17 09:29 AM
    all pure speculation.
    > jack
    Reply | Link to Comment
  •  
    Oct 17 11:02 AM
    Your infantile style does little to convince anyone of anything you're trying to say. You'd be more effective with a grownup approach.
    Reply | Link to Comment
  •  
    Oct 17 11:06 AM
    jhm47 wrote: "giving the middle eastern countries the ability to set energy prices"

    Hehehe, There is that Ameristani arrogance rearing its ugly head again! Giving? Giving!! Are you crazy? You must be. Giving?

    Ameristan has no power to give anything except pain and suffering to its own and all the peoples of the world.

    Whether through its Extremist-Capitalist economics or nuclear (not nookuler as the Decider says) weapons Ameristan will make sure that the whole world suffers for its vaunted "American Way"
    Reply | Link to Comment
  •  
    Oct 17 11:13 AM
    BrunoT: I am but a mere grasshopper in your presence Master.

    I am not trying to "convince" anyone. I learned a very long time ago that trying to convince Ameristanis of their foolishness is about as productive as talking to a mud fence.
    Reply | Link to Comment
  •  
    Oct 17 11:40 AM
    User30121: While jhm47's racism was thinly veiled, yours is virulent. Either way, both are racist.
    Reply | Link to Comment
  •  
    Oct 17 11:51 AM
    With a plethora of consumer gods and the job market hurting, how can there be inflation? Consumers with extra dollars must chase merchandise before there can be inflation. Now, as to the price of particular things or commodities there may occur shortages that will result in high prices , whether those things be a new Apple phone, game box or oil. And just a manufacturer can curtail production so as to keep the retail price on his hot new mechanize high so may the oil cartel cut production to keep the price of oil high.
    Reply | Link to Comment
  •  
    Oct 17 02:07 PM
    Oil at $150 will occur again, but I do not believe it will be a parabolic rise like we saw this last spring. Timing as a best-guess, it will begin to rise in Q2 and continue a steady march north to reach this price point and possibly a little beyond by 2011. I also believe we will see military misadventure in 2011 and 2012 shooting oil up to the moon which will crash our just-stabalizing economy.

    To Bosunj: My numbers show a 1/3 global casualties in the next World War. The Middle East conflict is a side show with Israel/Iran being a strategic roadbump for larger global conflict, ignited by a North/South Korea conflict and spreading wider, perhaps 2014 or 2015, dont know. But what I do know is this will be the final World War, as mankind is on a societal evolutionary path toward true globalization. This is an end of a era or what I call 'the end of ages' meaning that in the next 100 years man will become immortal through technology, first in body then later on the ability to exist as energy. And if you think America is going to 'lose' or 'we all die' you have another thing coming. There are weapons in the US arsenal the public is not aware exist. The Russians have a new gas/particle weapon for example that will be deadly but we have much more interesting things. I hope for your sake your local dicator in your 3rd world country finds you useful. For me, red white and blue baby!
    Reply | Link to Comment
  •  
    Oct 17 03:06 PM
    iThinkBig:

    Couple of points. First, your projection of 2014-5 for yet another war to end all wars may be off by a wee bit. The Decider has no intention of stepping down, and cannot afford to because stepping down will place him in legal jeopardy. The next war will start before the end of this year.

    Secondly, were it not for Ameristan's weapons Ameristan would be nothing. Rah rah rah, sis boom ,bah!! Congratulations Ameristan, you can kill everybody on the planet 50 times over and still have some left over. Yeeeeehhhhhhhaaaaaaa!

    As for my third world corner of the planet, well our leader isn't a dictator and he doesn't know me from Buddha. Just the way I like it. I'm well taken care of, thank you.

    Even if I were to be killed here for simply being born in America (a very real risk what with W and people with your ideas angering the rest of the planet) it would be preferable to having to die every day over and over again in the cesspool known as "America" I am fortunate enough to be free from.

    Reply | Link to Comment
  •  
    Oct 17 03:54 PM
    jhm47... Kinda curious why you're worried about Barack .. Just thank God Bush's term is near an end. Anyone has got to be better than this.. I'd welcome Idi Amin in office over the present loser...

    jegan

    GOP for Obama
    Reply | Link to Comment
  •  
    Oct 17 03:56 PM
    If the 'Decider' is GW Bush, you have assigned this man too much credit. Our market economics leading to this final descent into massive restructuring as a nation began long ago.

    You have your opinion on the outbreak of global hostilities breaking out, I have mine. There is potential for conflict in the Baltic region this December. But this would also be regional conflict, think of weapons and capabilities testing between two big nations rather then an all out affair. I'll write you in February 2009.

    And if you ever were American, you certainly are not one now. Nor will I ever renounce my nation over failed leadership. Instead, I will imperil myself attempting to change it for love of my fellow countrymen, freedom is worth dying for (I am from the Live Free or Die state).

    Your comments as a foreign national are simply bitter. I prefer we never use our arsenal to destroy, but unfortunately history rythmes and global fiscal crisis caused by those in power over money supplies create such events. But my outcome which is positive in the long haul seems vastly different from yours. You discount the entire population, including 60 M gun owners who are the final 'Decider' of our nation. I guess we will have to agree to disagree.
    Reply | Link to Comment
  •  
    Oct 17 04:35 PM
    IThinkBig:

    W called himself the Decider. as in "I'm the Decider, I get to decide!". Duh.

    Unfortunately I do still hold an Ameristan passport. I do have permanent residence where I live now. Were I an Extremist-Capitalist pig I could afford to purchase citizenship in several countries.

    That it is so inconceivable to you that someone having the bad luck to be born in your vaunted Ameristan would despise it so much proves how provincial most Ameristanis are, whether from New Hampshire or NYC.

    My comments may strike an uber patriot as bitter. Ameristan has earned my enmity.

    I simply do not believe you that you don't want to use your arsenal to destroy. Ameristanis are for the most part war loving maniacs. Everything about Ameristani culture is about war. The economy is based on war, schools propagandize for war from K-12, police are at war with citizens, citizens are at war with each other, professional sport glorifies the warrior, Joe six-pack fights with another Joe six-pack because he drinks a different beer, drives a different vehicle, speaks with a different accent and on and on and on. I gets freaking exhausting to be fighting every minute of everyday. Even the preachers extol the "virtues" of war! No, Ameristan is doing everything it can to start a war today and everyday.

    I know, just kill each other and leave the peace loving peoples of the world alone.
    Reply | Link to Comment
  •  
    Oct 17 05:09 PM
    In the "Christian" nation of the United States, cursed are the peacemakers, for they insult our egos and wound our pride. Blessed are the warmakers, for they spice up our picnics and our parades and our talk radio. For peace, we will rely instead on nuclear missiles that could kill millions in a flash, and even name them "The Peacekeeper [MX] missile". May God Bless Our Military. May God Bless Our Prosperity and Our Wealth. May God Bless Our Kingdom and Our Power and Our Glory. And may God Save Us from Christians like Jimmy Carter and shower us with Christians like George W. Bush.
    Reply | Link to Comment
  •  
    Oct 17 05:12 PM
    It is lamentable, that to be a good patriot one must become the enemy of the rest of mankind. ~ Voltaire
    Reply | Link to Comment
  •  
    Oct 17 10:01 PM
    It's sad that not only people of America fight and bicker among themselves, but the rest of the world as well. If everyone spent half as much time arguing over how to fix this economic situation, versus who and why is to blame we all would be better off. Optimism is always better than the alternative,add a reality check and well, we can all sleep a little better at night. The comments on "the corporate party" running this country is true, but they run the rest of the world too! Peace out:).
    Reply | Link to Comment
  •  
    Oct 17 11:25 PM
    Eureka! I just figured out who bosunj is! He is Reverend Wright!
    Reply | Link to Comment
  •  
    Oct 17 11:34 PM
    Bosunj: You really must remember to take your medication each day.

    Oh---and whatever third world utopia you're living in----stay right there!

    I truly hope that someday you will be able to put your hatred of the USA behind you. It must be terrible to be so filled with hatred as you are.

    One last thing: This rant in one of your posts above, "Either way, Ameristan is about to get its Karmic due very soon. A year from now there will be less than half of American'ts alive. Those that survive will suffer greatly." could easily be considered a terrorist threat. You really should be more careful. God Bless America!
    Reply | Link to Comment
  •  
    Oct 18 12:16 AM
    Enough - this string belongs on a political blog. The exception being in all places, situations, and times - when it comes to all things racists we as Americans can be the true deciders and in one LOUD voice say ENOUGH!!!!
    Reply | Link to Comment
  •  
    Oct 18 02:49 AM
    Live Free or die.......Free markets forever....anything else is slavery. I'd rather risk the slings and arrows of the economy than have a political party or dictator decide my fate.

    Bosunj take a chill pill. The USA is far from perfect but considering how much power this country has it has been remarkably restrained. No land grabs, No plundering of other's resources, etc...

    I for one like Ron Paul and think we need to go back to this country's original foreign policy of trade with everyone and alley with no one. You attack us and you'll regret it foreign policy.
    Reply | Link to Comment
  •  
    Oct 18 06:30 AM
    jhm47:

    In a country where speaking out in favor of the constitution is now considered a terrorist act I can imagine you would presume anyone who speaks truth about Ameristan to be a terrorist! Click on the link for a pamphlet distributed to Ameristani police telling them how to profile a terrorist. whatreallyhappened.com...

    Amusing, the complaint about politics on this thread.....the whole premise of this site is rah rah rah sis boom bah we're number one in the world buy our bulls**t!! Calvin Coolidge said the business of Ameristan is business..... The rest of the world says the business of Ameristan is bulls**t.

    The comment about hatred is funny. This from the most hate filled people on the planet. The only group in the world to have killed more people than Ameristanis is the church. Unfortunately, you're working overtime onthree shifts to catch up.....

    At any rate, my sentiments run more to disgust with Ameristanis and pathological hatred for the Ameristani government.

    The nationalist not only does not disapprove of atrocities committed by his own side, but he has a remarkable capacity for not even hearing about them. ~ George Orwell

    Free markets forever???Are you living under a rock???? Two trillion dollars has just been stolen from working people (in Ameristan alone) to subsidize the Banksters greed an incompetence. Free markets???? The privatization of profit and socialization of expenses is free markets? And you wonder why the rest of the world hates Ameristan so much????

    Reply | Link to Comment
  •  
    Oct 18 09:01 PM
    We seem to have pushed bail outs aside in several comments, so I'll throw in my 2 cents on "lets diss America". My great, great, great grandfathe Daniel carried a rifle in the Revoluntionary War and was with Gen. Washington at Trenton.
    My great uncle George was killed at Shiloh fighting on the Union Side. My Uncle George commanded a group of destroyers in WW II defending convoys on the North Atlantic from German U-Boats. My brother was in the Pacific on a destroyer and received 5 battle stars for actions against the Japenese. I was in the post war Army in Europe.
    So spare me this garbage about the big bad USA. If not for us, a major part of the Western Hemisphere would be speaking German or Japanese and the financial systems that these guys are complaining about wouldn't exist. And by the way don't forget that George Bush Senior was shot down in the Pacific defending his country so maybe we should cut his son a little slack. Parky from Savannah
    Reply | Link to Comment
  •  
    Oct 18 11:30 PM
    who cares about Bosunj? He can try to lump all the people in a 300 million person diverse nation into one stereotyped group or mold, but it doesn't make it true. I have no hatred in my heart for him. But really, who cares about what he thinks? He is obviously a very bitter and unhappy man. I actually feel sorry for the little feller.
    Reply | Link to Comment
  •  
    Oct 21 09:48 PM
    Why is it automatically assumed when one differs with Barrack one is automatically a racist. Whether you know it or not, there is more to Mr Obama than the color of his skin. It almost seems like you are being a racist? My opposition to Mr Obamas spend crazy tax crazy agenda is anchorted in his policies anbd not his pigments. But thank you for your amusing remark.
    Reply | Link to Comment
  •  
    Nov 19 05:09 PM
    to bosunj and IThinkBIg, You guys outdid yourselves today on giving your views to our near future. Many commentaters have asked the timing of gold rising in price, you two have not been afraid to state your opinions on approximate dates. Im impressed. bosunj seems more correct when he spoke of the "Decider". A war would be needed to put the world on the edge of world war three. I've been fearing that for a while. Its not just his legal troubles, but his ego that would cause him to start a war so he can end his term as a hero. A nuclear exchange would put the world in such fear, financial collapse, and if the arabs loose as the bible indicates, they would erupt in such hatred that they would be agains everyone as the bible also indicates, fighting against the "antichrist"... Israel and Iran as well. I dont mean any offence to the arabs, just paraphrasing the bible. WHo knows whats going to happen but I do fear the instabillity of G. W. B. 's mind. Since this is about gold and oil You two have answered many questions in your "opinions" that many gold bugs have been asking. When? Great Comments.
    Reply | Link to Comment
  •  
    Nov 19 05:32 PM
    Hey Guys, I had'nt read all the comments before I sent my last comment. Let me say a few other things here, since stating my opinion is free. You know as well as I do America is a great country. No dought. But we are only people, no better than anyone esle. 500 hundred years ago we were not a great country, We were built on fallen empires and nations ideas going back farther than ancient Greece. We are the best now and for the last hundred maybe two hundrew years, a short time in history. The world is a wheel, we wont always be on top. We didnt come from monkeys, we came from GD. Prejidous or not, who cares? The policies of G. W. B. have caused our financial collapse, unnecassary wars causing maybe a million deaths, I have with good logic think our Great nation is in for a fall. The most god fearing and decent germans during world war two were sent to concentration camps because they spoke out. German people are fine people too, as are arabs, A society can go bad if you block out people's opinions and our gov is blocking out the real news on gold and I believe on military ventures just to name a few.
    Reply | Link to Comment
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