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Wild Claims About Gold and Oil: Any Basis in Fact?
by Jamie Dlugosch
The financial industry is full of experts making fantastical calls and predictions about the markets and individual stocks.
Sometimes these calls are dead-on. Other times they couldn't be more incorrect.
Most of the time, the wildest claims are simply meant to make noise and grab attention.
Occasionally, though the fantastical claim has a basis in fact and is genuinely believed by those espousing the claims.
Some great examples include Meredith Whitney and her wild calls in advance of the financial crisis. She had conviction in her belief that banks and mortgage companies were in big trouble and she was dead-on.
More recently she predicted the collapse of municipal governments in the wake of Detroit's bankruptcy. She had the same conviction, but she has been dead wrong in her call.
Today we are getting fantastical calls in the commodity market.
Specifically, some see even bigger declines coming in the price of crude oil and gold.
Earlier this year I wrote about the possibility of $80-per-barrel crude prices. At the time I thought that prediction to be a bit sensational, given there were an equal number of opinions that oil was headed to $150 per barrel.
Now, with oil solidly below $80 per barrel, comes a prediction of $30 per barrel.
That's the opinion of Raoul Pal of Global Macro Investor.
The main idea from Pal is that a strong dollar could get a lot stronger as institutional money pours into that trade. As those moves accelerate, you could see a precipitous drop in crude prices.
In addition to dollar pressures, Pal thinks the combination of excess supply and less demand are conspiring against oil.
On the surface you can't argue with lower oil prices. At a minimum the momentum of the trade almost makes it a self-fulfilling prophecy, but falling to $30 seems a bit far-fetched.
While OPEC and Saudi Arabia have helped precipitate and maintain the recent drop in crude, there will be a line in the sand if you will.
I suspect $60 is about where that line will be drawn and I find it hard to believe we get there.
Over in the gold trade the strong dollar is wreaking havoc.
But like one would expect with a metal of minimal real utility, psychology also plays a big part.
Ron Insana, a commentator for CNBC, made the case for gold prices to plunge to $800 per ounce.
Given that global stability, however shaky, is more the norm, gold could easily fall to that level.
Again much of the decline can be attributed to momentum.
Here the argument for even lower prices can be made.
Gold, as mentioned, has no real utility. It is a fool's investment that granted worked well for a decade.
But as individual investors begin losing money in what was previously a sure thing, the rats will jump ship.
And when they do it would be easy to see gold dropping back to the $500 level.
Count me in with Insana that gold could easily reach these fantastical levels.
It is always tricky when making a bold claim, but in some cases the bold claim will be the right claim.
Here, I would think the gold claim will happen more easily than the oil claim.
Jamie Dlugosch Editor Investor Research Institute
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