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Year-end leap in oil price could bode well for gold in 2009

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Lawrence Williams
Friday, Jan 2, 2008

Oil, and to a lesser extent gold, recorded a strong price surge on the final day of the year, which could be bad news for the U.S. dollar, but positive for precious and base metals at the beginning of 2009.

Oil is arguably the most oversold commodity of all in the markets having fallen from $147 a barrel in July down to as low as $32 a barrel in recent weeks, despite OPEC’s avowed policy to cut production by some 2.2 million barrels a day to restabilise prices at a higher level. Indeed OPEC would like to see the oil price back to $100 a barrel and certainly has the muscle, if perhaps not the will, to continue production cuts until this is achieved.

Longer term the peak oil scenario, which sees production potential reaching a maximum followed by a serious decline, if correct, would suggest a continuing high oil price environment from late in the next decade, although timing of the ‘peak’ is open to argument. Cognisant of the reserve depletion likelihood, major oil producers may thus be more ready to make production cuts to maintain prices at what they see as reasonable levels with a contrarian effect on the strength of the U.S dollar as, for the time being at least, the world’s largest consumer of oil and oil products. Some would say that security of continuing oil supply is what the Iraq Wars have, in reality, been all about.


But if stronger oil prices could lead to a weaker dollar (its strength further eroded by the huge increase in money supply being pumped into the economy by the government to try and avoid prolonged recession) and a weaker dollar generally means a stronger gold price.

$100 oil would probably mean on balance $1,000 gold going on historic ratios – so the potential (probable?) rise in oil price is not necessarily a formula for huge gold price gains, but sufficient to give the gold mining sector a good fillip and bring selected gold mining stock prices back to their peak levels. But the market is likely to be much more sophisticated in its analyses of gold stock values having had its fingers burnt badly in the past year so it will be important to pick stocks that boast underlying strength and strong finances.

The year-end boost in the gold price, albeit in pretty thin trading because of the holiday period, has taken it up through what had seemed to be a strong resistance level so there would seem to be decent potential for at least a little growth over the next few months, but market nervousness and volatility could see the price hitting a series of successive peaks and troughs as the market tries to stabilise. While the overall trend may look to be positive don’t expect it to be a smooth ride!

This article was posted: Friday, January 2, 2009 at 5:18 am

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