How high could gold go in 2008?

Dominic Frisby shares his predictions for commodity prices in the year ahead - and explains why he's steering clear of all things British.

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Happy New Year - I hope you had a great festive period.

I must admit, I'm absolutely delighted and what's more I'm feeling rather clever. In the Christmas issue of MoneyWeek I said that $850 gold was a certainty which I expected before the end of January, possibly even before the end of the 2007 - and lo and behold on January 2nd we get it.

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Where were you when it happened? I was sitting in a hotel in Dublin without internet access, with no idea such a momentous event was taking place. I only found out the next day.

Interestingly, the record stayed largely off the headlines as it was upstaged by $100 oil. That's good. The longer this metal stays out of the news the less likely it is to get too bubbly too quickly...

So where's gold heading for next? The next big figure is the psychological barrier of $1,000 and it's not that far away - less than a 20% move from here. We're going to see that and more by May, in my view, before a violent correction.

Meanwhile, the Canadian mining juniors are bouncing now that tax-selling has dried up. I'm expecting that bounce to continue on into the spring - they are still undervalued compared to the underlying metal.

So what's going to happen in 2008?

On my radio show, Commodity Watch Radio last week, I asked a number of experts that very question.

Well-known commodities investor Jim Rogers sees the commodities bull run continuing. He remains keen on commodities of all kinds, but the areas where he's putting new money to work are agricultural (or 'soft') commodities. He's also shorting US investment banks, where he believes the credit-crunch related strife will continue.

I agree with him, though I think the easy money has already been made shorting banks and going long agriculturals. But some softs still look comparatively cheap: cotton, sugar, coffee and perhaps even cocoa (you can buy into many of these commodities using trackers provided by ETF Securities).

Meanwhile, Campbell Smyth, adviser to the Phoenix Gold Fund, sees huge value in junior gold miners. With his Australian perspective he's also very bullish on coal and iron ore. James Turk of Goldmoney sees a big year for silver, with it perhaps reaching $30 an ounce - its currently at around $15.

Central bankers are a bunch of clowns'

Meanwhile, Dr Marc Faber, of the Gloom, Boom and Doom newsletter, was extremely eloquent on the subject of central bankers who he describes as a 'bunch of clowns'. He sees on the one hand, huge inflationary forces at work as central banks inject unprecedented amounts of liquidity; but these are up against equally huge deflationary forces in the private sector as the credit problems continue, banks tighten lending and hoard cash.

The problem with these injections of liquidity is that bankers can't control where it ends up. At the moment it seems to be finding its way into commodities gold and oil in particular which is not what the central bankers intend.

What is possible is the ugly scenario of decline in value of the things against which we in the West hold debt housing being the obvious one without a corresponding decline in the debt levels, coupled with a rise in cost of the things we need such as food and energy.

Bad news for British assets

These are a clever bunch of guys, mostly heavyweight players in the resource sectors. All were bullish on gold. Not one was bullish on the pound, on UK housing or indeed anything British. Two cited declining North Sea oil supplies as a major problem for us and our currency.

Meanwhile gold valued in sterling is going through the roof; sterling was the only currency not to go up against the dollar yesterday; 2007 saw the biggest declines in sterling since 1992; our current account deficit and debt levels are ballooning; and our housing market is toppling like a drunken, knock-kneed giant carrying a pile of plates.

Who on their right mind would buy sterling now? With hedge funds commanding more influence on markets than ever, I think a sterling crisis is a very real possibility this year. That's just what Gordon needs right now, isn't it?

Anyway, as it's the time of year for crystal ball gazing, here's what I expect to see in 2008. I think gold will reach $1,130 an ounce, while oil will hit $130 a barrel. By historical standards, silver is vastly undervalued compared to gold; if gold continues to rise, silver will start moving soon and the silver / gold ratio will close. I see $22 an ounce possibly $25 by the spring. Similarly, natural gas is undervalued compared to oil - I expect its price to reach $15 per MMBtu.

I also reckon the HUI (the index of gold miners) will rise to near 700 - its currently at around 450. I also think we'll see higher prices across the board for agricultural and soft commodities, with sugar, cotton and coffee to be amongst biggest risers.

In short - stick with resources, avoid sterling assets, and you should have a very happy year indeed.

Turning to the wider markets

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Oil stocks lead FTSE rally

Oil stocks led the FTSE 100 in an afternoon rally yesterday which saw the blue-chip index add 63 points to end the day at 6,479. Tullow oil topped the FTSE leaderboard with gains of over 5%, and it was also a good day for miners including Lonmin and Vedanta Resources. Retailer Next was the day's heaviest faller, closely followed by peers Home Retail Group and Kingfisher. For a full market report, see: London market close.

Elsewhere in Europe, the Frankfurt DAX-30 fell 33 points to end the day at 7,908. And the Paris CAC-40 was up 8 points at 5,546.

On Wall Street, stocks closed mixed following a tentative day's trading. The Dow Jones was up 12 points at 13,056. The Nasdaq fell 6 points to end the day at 2,602. And the S&P 500 was unchanged at 1,447.

In Asia, Japanese investors came back to the first session of the New Year in the mood to sell. The benchmark Nikkei 225 fell 616 points to end the session at 14,691. However, in Hong Kong, the Hang Seng added 632 points to close at 27,519.

Sterling sinks to new lows

Crude oil hit an intra-day high of $100.09 in New York yesterday but had fallen back to $99.28 by this morning. In London, Brent spot was at $97.52.

Spot gold was hovering just below yesterday's record high of $869.05 this morning, last trading at $863.60. And silver had fallen to $15.31.

In the currency markets, sterling hit its lowest level against the dollar since August 2007 - 1.9675 - before climbing back up to 1.9707, and hit a fresh all-time low against the euro before edging back up to 1.3391. The dollar was last trading at 0.6793 against the euro and 109.28 against the Japanese yen.

And in London this morning, Incomes Data Services announced that UK wage settlements over the past three months were at their highest level since at least 1994 as rising inflation fuelled pay demands. The median settlement was 4%, up from 3.4%. Interestingly, in the light of recent disruption on the railways, Network Rail was one of the companies awarding higher pay settlements, giving 4.8% more to maintenance staff.

Finally, our recommended article for today...

Are we heading for a house price crash?

- MoneyWeek subscribers can read our latest roundtable on which stocks are still worth buying in the latest issue, out today, but non-subscribers may also be interested to read what happened at a previous roundtable, since dubbed our 'property punch-up'. When we asked a group of property experts their opinions on the state of the housing market, it all got rather heated. You can read the full discussion here: Are we heading for a house price crash?

Three reasons why the US faces recession in 2008

- Presidential election years are not usually recessionary, but several factors are colliding in a perfect storm that could make 2008 a very dark year indeed for the US economy. For a rundown of the key threats to US growth, read: Three reasons why the US faces recession in 2008