The big news in the commodities world lately is $10/barrel drop in the oil price in the last several days. The decline was initially blamed on Fed-Ex lowering its outlook for global growth and industrial production when it reported its latest quarterly earnings.
The world’s second biggest package delivery company forecast a continued slowdown in global trade. Reports that Saudi Arabia is keeping production high to drive oil prices lower were also blamed.
The actual reason for the drop in crude oil was likely political; with an upcoming election, the current administration is pulling as many strings as it can to keep voters happy and remain in office. Gasoline prices above $4/gallon and crude oil above $100/barrel isn’t politically acceptable so close to a major election.
The real action meanwhile has been in gold, silver and the mining stocks. The precious metals group has been relatively unaffected by the latest drop in oil and other commodities and for good reason: gold is perhaps the best pure measure of inflationary pressures.
The coordinated bond-buying program of the European and U.S. central banks has given gold all the excuse it needs to continue its march to higher price levels. Silver meanwhile is riding the back of the gold bull market as the “poor man’s gold.”
Gold’s ascent has been a combination of a weak dollar, which has been pushed down in recent weeks in anticipation of the central bank actions of the ECB and the Fed. The German's court decision to ratify the European Stability Mechanism of Euro 500 billion also boosted gold prices.
The pledge by the Chinese government to raise subway and railway projects spending by RMB 800 billion last week and Premier Wen's confidence in achieving 2012's growth target benefit both risky and gold markets, as Austin Kiddle of Sharps Pixley pointed out.
An analyst with a major U.S. investment bank has published an extremely bullish long-term forecast for gold in the wake of the Fed’s QE3 and Operation Twist programs.
What makes the prediction surprising is the fact that it comes from one of the more conservative financial institutions with an historically tepid gold outlook. Bank of America Merrill Lynch’s (NYSE: BAC, Stock Forum) Francisco Blanch predicted a gold price of $2,400 an ounce by the end of 2014 when the Fed says it will stop purchasing mortgages.
“Given the new open-ended nature of QE3, the upward pressure on gold prices should continue until employment is strong enough to require a change in policy," Blanch added. "In our view, this is unlikely to happen until the end of 2014.”
This extremely bullish gold forecast contrasts with the median gold price forecast by financial analysts according to a recent Bloomberg report.
The median forecast for gold in 2013 is $1,750; the range is from a low of $1,560 to $2,050 for next year. Clearly the analyst consensus is overly conservative. From a contrarian sentiment standpoint this is bullish for gold.
Meanwhile a Citigroup Inc. (NYSE: C, Stock Forum) analyst compared the gold price breakout in the week of 3 September, 2007 to that of the week of 27 August, 2012 and predicted gold price could reach $2,450 to $2,500 by Q1 2013.