An interesting two weeks since we last reported. Gold and oil prices have enjoyed positive progress, although in the order of things two weeks is a very short period of time and it is too soon to draw final conclusions. At the time of writing crude is back at $119 per barrel, whilst gold is above $835/oz - from a technical point of view the charts suggest that prices have now stabilised. Recent events are positive for both, Russia's action in Georgia is just the sort of thing to get the gold price buzzing and now that has started, it is more likely than not to carry on unless the US fronts up. Because of their commitments in Iraq, Afghanistan and potentially Iran, it is hard for them to do that, which the Russians are certainly aware of.
Gold bullion has benefited from a strong surge of buying in India. This is the wedding season, where traditional gifts of gold jewellery, create a dramatic increase in demand. According to the Times of India, the sales volume has almost doubled in the past week alone. There is also a long standing supply issue for gold, the amount of new gold mined has, for a long time, been insufficient to meet current demand. One can quite easily see a chance here for gold to strengthen.
It remains the case that hardly any investor owns gold. The potential upside coming from the widening of ownership will eventually lead to the third and final stage of this bull market, which we still believe will take the price to about $2,000/oz. It would not surprise us one little bit if the next surge for gold is twinned with an even greater recovery in gold mining shares, which over the recent period have underperformed the metal. The natural gearing effect of an improved gold price on the profits of gold mining companies is indisputable, which should lead to a positive re-rating of gold mining shares.
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No let-up likely in oil's rise
If, as is likely, the oil price holds somewhere above $100 per barrel that should also lead to a positive re-rating for oil shares. We reported two weeks ago that they are rated to reflect a medium to long term oil price of only $53 to $60 per barrel.
No matter what happens in the short term, the long term outlook for demand is just huge. Jim Rogers, a leading advocate of the commodity and energy super-cycle, recently pointed out that India's demand for energy per capita is 5% of South Korea's and Japan's, whilst China's demand is only 10%. Chindia's population totals 2.3bn. Significant growth in demand is, over time, just inevitable.
Against the long term increasing demand, supply remains tight. Most major oil fields in the world are in decline, with no hint of a major discovery on the horizon and unwillingness by oil majors to invest sufficient money in unfriendly territory to find one.
Jonathan Davis, in his Financial Times column, The Last Word, on 18th August, said "This is not the end of the medium term oil/metal/grains story, let alone a deflating bubble, although there is an intervening dollar and economic growth script, that makes the underlying picture harder to see".
This article was written by John Robson & Andrew Selsby at Full Circle Asset Management, as published in the threesixty Newsletter.
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