Steep Adances In Oil, Gold, Silver Expected To Continue

Oil and gold are expected to continue rising throughout the final months of QE2. The potential growth over the next few months for gold is could be another 15%.

Robert Lenzner
StreetTalk
FORBES BLOGS
Apr. 11 2011 - 2:35 pm

The price of oil and gold are likely to rise for the final 3 months of QE2 buttesssed by the widespread geopolitical unrest, and the approach of the summer driving season.

If the Fed keeps buying $100 billion of Treasuries until July 1, you can calculate that each $100 billion will push the commodity index up another 5% and the price of oil $7.00 a barrel. This is the conclusion of Russ Winter of Minyanville, a widely followed financial blog.

As QE2 is on couse through June, then, the potential uipward thrust in commodities is another 15% in total– while the price of oil could rise another $21 a barrel– putting it at $140 a barrel for Brent crude.

This bullishness on commodities was supported by PIMCO’s Richard Clarida, who told Bloomberg today that “secular forces are at work in suplly constraints of all commodities– and that we may not experience the classic price trend for commodities, which have always been “sharp advances followed by sharp declines.”

Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, also feels strongly that “one factor fueling the run” in oil and gold has been the continued decline of the U.S. dollar, exacerbated by the political wars over the nation’s bloated budget deficit and the oncoming debate about raising the debt ceiling of the U.S.

As roughly two-thirds of the U.S. trade deficit in related to oil imports, oil prices have tended to go up asa the dollar moves lower. This negative correlation is a powerful force in predicting oil prices, Holmes feels.

On the other hand, Holmes sees a positive correlation between oil prices and gold prices. Some 75% of the time gold follows oil up, a trend which should be buttesssed by the onset of the summer driving season. Last week the index of gold mining shares were up 6.5% or almost double the price of gold.

Holmes also points out that King Abdullah’s $125 billion stimulus spending for wages and social infrastructure “has driven up the breakeven price for Saudi oil production to $88 a barrel; meaning a higher price for oil is in the interest of the Saudi budget and gdp. Bear in mind there could be social and political unrest in this feudal monarchy despite these monetary attempts to pacify the polulation. Oil prices could leap to $200-300 per barrel “if Saudi Arabia is hit by serious unrest, former Saudi Oil Minister Yamani said,” according to US Global Investors weekly market report.

If political unrest threatened Us supplies of crude oil from Saudi Arabia, “we must protect the source of our energy,” former Sec of State and Treasury Sec. James Baker warned yesterday on CNN. “If we lost some acess to energy resources in the gulf we’d be in big trouble,” Brady warned. This kind of anxiety in high places also puts a danger premium in the price of oil.

Meanwhile, supply constraints from the decline in mature fields in Mexico, Norway and the North Sea in respect to rising demand for oil in China and India, are also pressures going toward higher prices.

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