Good morning! I hope you had a great weekend. First things first. The bounce you’re seeing in gold and silver are not — I repeat, not — the beginning of their next legs up.
So if you’re a short-term trader, don’t get overly aggressive in these markets right now. They’re likely to yo-yo around, with a bias toward the downside and a test of the $1,325 and $1,265 levels in gold as we head into year end, and $18 to $23 in silver.
Having said that, maintain all core long-term metals positions. You do not want to be shaken out of them. Though not expected until next year, if gold closes above its recent record high of $1,428 — a new leg up will be underway.
Now, on to a forecast that I would like to reconfirm in a market that impacts us all quite dramatically: Energy.
Despite the ongoing financial crisis, I expect to see at least $200 oil and $6 a gallon gas sometime in the not-too-distant future.
The first step will be to see the price of oil hold the $68.07 level by the end of this year, which should not be a problem.
Then, once oil closes above the $99.37 level — probably by the middle of next year, watch out: It will be your signal that oil will make new record highs within two years.
Bottom line: Anyone who thinks the oil and gas bull markets are over — should wake up and smell the coffee!
Look, the underlying fundamentals for the energy markets have NOT changed one iota. We face catastrophic shortfalls in oil supplies down the road …
Oil fields all over the world are now well past peak production. So much so that oil production is likely to peak less than 10 years from now — and a decade earlier than most have previously estimated. There are now also indications from the IEA that production may have already peaked!
Moreover, in a recent survey of 800 oil fields worldwide, fully three-quarters of global reserves have already reached peak production.
Oil production is now declining at nearly twice the pace as calculated just two years ago. The IEA estimates that the decline in oil production in existing fields is now running at 6.7% a year compared to the 3.7% decline it had estimated in 2007.
Chronic underinvestment by oil-producing countries, made worse by the global financial crisis, dims hopes for new future supplies.
In addition … demand has not fallen much … there’s still a lack of refineries … supply disruptions from weather and terrorism are a constant threat … and more.
Even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production.
And to keep up with the expected increase in demand between now and 2030, the world would need to find six Saudi Arabias!
Short of that, and the world could reach a major “oil crunch” within the next five years.
And, there are two more forces which I believe could accelerate the crisis …
Force #1: The weakening U.S. dollar. Oil is priced in dollars. So as the dollar falls in value, the price of oil naturally experiences an upward revaluation in dollar terms.
We’ve already seen the effects of this in the oil market, with all the talk about how oil has become a hedge against a falling dollar, and with speculators now trading oil in true “black gold” fashion — running into oil just like they do with gold, whenever the dollar starts to slide.
But make no mistake about it: The “dollar hedging” aspect of the oil market is not going to change anytime soon because …
A. Despite its recent rally, the dollar is in a long-term downtrend, as I’ve mentioned many times before.
B. Oil will continue to be traded mainly in dollars until a new world reserve currency is established.
Yes, there have been attempts to price oil in other currencies recently, namely the euro. But that won’t do much to eliminate the “dollar-hedge-aspect” of oil to any extent.
Force #2: China is cornering much of the world’s oil supplies. China’s muscle-bound economy eats like a hog — an energy hog. Even though demand has slowed a tad, the insatiable giant consumes more energy than its citizens can produce in their backyard.
So over the last few years, China has gone to the market to shop very aggressively for oil supplies, adding to their reserves. It has invested in the Middle East, Africa, Iran, Venezuela, Brazil, Russia, Mexico and more.
Keep in mind, money is no object for China. Beijing now has nearly $2.7 TRILLION in its piggy-bank. But China still lives hand-to-mouth energy-wise, barely keeping ahead of its appetite.
In fact …
More than 40% of China’s oil needs must be met through imports. And right now, there are massive energy shortages mounting again in China.
In fact, just six months ago, China had enough fuel on hand to meet more than 36 days of demand. Today, it has only 16 days of reserves on hand!
Based on its latest forecast, China’s oil giant Sinopec stated in its latest forecast that China will consume 286 million tons (2.088 billion barrels) of oil by 2015 and 336 million by 2020 (2.45 billion barrels) — staggering increases of 32% and 55%, respectively, from this year’s total of 216 million (1.577 billion).
The majority of that oil will have to come from imports. Which means profit bonanzas for anyone investing in oil and gas companies.
This is why I believe that virtually all pullbacks in the price of oil are likely to be met with massive buying from the Chinese, effectively putting a new floor under the price of oil at around the $70 level, worst case.
On the upside, given all the forces I just discussed above — I believe we will see over $100 oil in 2011 … and eventually see $200 oil and $6 a gallon gas by late 2012.
My view: If you have long-term capital to commit to the energy sector,
I suggest considering a diversified mix of shares in long-term energy positions. My top-rated picks — from my latest technical and cyclical scans — include the following …
A. Great energy companies such as ExxonMobil (NYSE:XOM) … China Petroleum & Chemical Corp. (NYSE:SNP) and … CNOOC (NYSE:CEO), to name a few.
B. Energy-based ETFs such as Energy Select Sector SPDR ETF (NYSE:XLE) and iShares S&P Global Energy Sector Index Fund (NYSE:IXC).
C. Energy royalty investment trusts such as Permian Basin Royalty Trust (NYSE:PBT) and Enerplus Resources Fund (NYSE:ERF).
For specific short- and intermediate-term recommendations, be sure to become a member of my Real Wealth Report, for just $99 a year.
Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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