Oil Price Prediction Through Gold
Source: http://feeds.feedburner.com/~r/qvmgroup/yrMF/~3/509239257/1335Posted on Sunday, January 11th, 2009 | In Market Commentary
If you assume (and that is a uncertain assumption) that gold is fairly priced, and that oil is in search of its fair price, it may be possible to glimpse the “fair value” of crude oil by examining the historical price relationship between the two commodities.
Here is a 20-year, weekly chart of the price of West Texas intermediate crude divided by the price of gold bullion.
click image to enlarge
The 10-year average ratio in 2000 was about 0.06. Today the 10-year average ratio is about 0.10. A visual inspection suggests to us that 0.07 might be a central tendency (although most of the lower values were in the decade of the 90’s, and most of the higher values were in the decade of the 00’s).
The current low price ratio of about 0.48 was approximately reached or exceeded in 1994, 1995 and 1998 (3 of 20 years).
Today WTI crude is at about $41. Gold is at about $855.
Applying the averages we might think of a “fair value” for oil in the $51 to $86 range. If we apply the apparent 0.07 central tendency, we might think of an oil “fair value” of about $60.
That range of prices is not so different than other sources of estimates.
The Saudi oil minister recently said that $70 is the necessary price for oil to be attractive to all sides for various reasons
We have read that the cost of finding and lifting new oil from deep ocean wells (the largest expected source of oil reserves replacement) is about $70 to $75.
In a September 2008 article, we used different criteria to predict that oil would probably fall to about $70, but discussed some scenarios that could go below $30, as well as to $90.
The most recent Department of Energy – Energy Information Agency prediction for imported light sweet crude in 2010 is about $82.
These observations may be useful to those interested in oil or gold funds such as USO, GLD, BPT, COSWF and others.
Richard Shaw
QVM Group LLC
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 About Richard Shaw (http://www.QVMgroup.com)
Richard is a principal of QVM Group LLC, a fee-based investment advisor based in Connecticut with clients across the country. He provides investment coaching to "do-it-yourself" investors, and manages portfolios for those who prefer not to make their own decisions. His investment approach is based on value, asset allocation, benchmarking, expense control, risk management, customizing portfolios to each client's specific circumstances, and regular communication about strategy and performance. The QVM Group team also provides municipal refinance services, strategic business planning and financial analysis service for new ventures, private acquisition analysis, and custom investment research. Richard's extensive experience, includes serving on the Board of Directors of Aberdeen Asset Management PLC (London Stock Exchange: ADN), membership on the Board of Directors of Phoenix Investment Counsel (renamed Virtus Investment Advisors), a U.S. pension manager and investment advisor to the Phoenix Funds (renamed Virtus Funds), as well as serving as Managing Director of a series of offshore investment funds based in Luxembourg. He has led institutional asset management sales and had overall responsibility for management of a U.S. mutual funds broker-dealer. He was a charter investor and member of the Board of Directors of several internet companies, including Lending Tree prior to its IPO. He is a graduate of Dartmouth College. QVM Group LLC is a Registered Investment Advisor. Visit the QVM Group website http://www.qvmgroup.com/QVMinvest/ |
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