Why you should take a tip from Russia's central bankers

They looked like the safest predictions of the year, but even the most bullish investors didn't expect oil to top $100 or gold to breach its all-time high so soon. It's time to follow the Russian central bank - and buy gold.

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No one can't predict the future. The wildly varying performance of economic pundits, fund managers and press tipsters from year to year more than amply demonstrates this fact.

However, among the safer bets for 2008 certainly from a MoneyWeek point of view - were the widespread predictions that oil would hit $100 a barrel, and gold would breach its all-time high (not adjusted for inflation, of course) of $850 an ounce, a level last seen in 1980.

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But even the most bullish followers of oil and gold might not have expected to see their forecasts proved right quite so quickly

Yesterday was a good day for resources bulls, though perhaps not so good for the rest of the global economy.

The oil price hit $100 a barrel, while gold shot up to $861 an ounce. Both events are largely being put down to geopolitical tensions the turmoil in Kenya and Pakistan, and unrest in Nigeria are among the more widely quoted reasons.

The real reason oil and gold prices are rising

But as I've mentioned before, this is all noise. There's always global tension somewhere. For most of last year, geopolitical fear was centred on Iran, until we were told that they didn't actually have any nuclear weapons after all. So now we can all shift our worry focus to Pakistan, which does have nuclear weapons. Nigeria has suffered from oil-related strife for years now, so there's nothing new there.

The point is, you can always find a reason in the news on which to pin daily moves in prices. But oil hasn't risen all the way from $10 a barrel to $100 a barrel in the matter of a few years because the world has become a more dangerous place. The same goes for gold.

There have been very sound reasons for both to rise. On oil, supply is having a tough time keeping up with demand; and people are starting to realise this as the growing mainstream acceptance of the Peak Oil argument shows (see: How will you live in a world without cheap oil?). The plunge in the dollar has also helped fuel the rise with commodities priced in dollars, the slide in the US currency has made them cheaper for foreign buyers.

Whether oil can sustain these levels is another question, of course. With the global economy looking distinctly shaky, there's definitely the potential for the oil price to take some short-term knocks if global demand slows. No bull market goes up in a straight line, after all.

However, the long-term picture looks good and more to the point, even with the soaring oil price, the likes of BP and Royal Dutch Shell still don't look particularly expensive, with both sitting on low double-digit forward p/es.

Will gold hit $1,200 this year?

So what about gold? Well, our commodities commentator Dominic Frisby will be taking a closer look at this on Friday, but I think it's safe to say there's plenty of life in the yellow metal yet. Gold is also supported by rising demand and falling supply production in South Africa is at its lowest since the 1930s for example, while central banks are no longer as keen to sell, especially at a time when the world's reserve currency, the dollar, is under threat. In fact, according to Ambrose Evans Pritchard in The Telegraph, Russia's central bank has already said "it aims to raise the gold share of its huge foreign reserves to 10%."

More to the point, gold is a good way to preserve your wealth against both inflation and deflation. Now that both of these forces are threatening the global economy, and the US and UK in particular, demand for gold as a safe haven' is likely to keep rising.

Ross Norman of TheBullionDesk.com, reckons that gold will hit $1,200 an ounce at some point this year. It looks punchy, but he's been the top market forecaster for the past four years. And with the global economy in the state it's in, we wouldn't like to bet against him being right this year. To learn about ways to buy into gold, see MoneyWeek's investing in gold section.

Turning to the wider markets...

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Biggest ever first day fall for Dow

In London, the FTSE 100 fell back from an earlier high of 6,512 as Wall Street opened lower (see below), going on to end the day down 40 points, at 6,416. Alliance and Leicester topped the blue-chip risers with gains of over 16% on reports of takeover talks with Spain's Banco Santander. For a full market report, see: London market close.

Stocks began the year in negative territory elsewhere in Europe too. The Paris CAC-40 fell 63 points to end the day at 5,550. And in Frankfurt, the DAX-30 was down 118 points at 7,949.

Across the Atlantic, the Dow Jones suffered its biggest point drop ever for the first session of the year, falling 220 to end the day at 13,044. The weakest manufacturing data in four years from the Institute of Supply Management rattled investors, as did rising commodity prices. The other major indices were also lower: the tech-rich Nasdaq fell 42 points to end the day at 2,609, whilst the S&P 500 was down 21 points at 1,447.

Asian markets echoed yesterday's sharp falls on Wall Street today. The Hang Seng fell 673 points to end the session at 26,887. The Japanese market was closed again today.

Oil touches $100 a barrel

Having tipped the $100 mark in New York yesterday, crude oil had fallen back to $99.35 this morning. And in London, Brent spot was at $97.97.

Spot gold was last trading at $857.80 this morning, higher than its $855.70 close in New York last night. Silver, meanwhile, was last trading at $15.23/oz.

In the currency markets, the pound remained near its record low against the euro, last trading at 1.3436, and was also languishing at 1.9771 against the dollar. And the dollar was at 0.6794 against the euro and 109.40 against the Japanese yen.

And in London this morning, shares in DSG experienced their biggest slump in four years on an announcement that annual profits will miss analysts' forecasts by £40-50m. The electronics retailer blamed 'disappointing' trade at its PC World stores over the key Christmas period. DSG shares were down by as much as 21% in early trade.

Finally, our recommended article for today...

Why this will be the year of $100 oil

- Goldman Sachs analysts have predicted that the oil price could reach $105 by the end of the year and most commodity investors expect an average price of over $100 in 2008. Unless there's a sharper-than-expected slowdown, that is. For more on the experts' predictions for oil in the year ahead, read: Why this will be the year of $100 oil

Can gold continue its seven-year winning streak?

- Measured against gold, oil has barely risen at all - it's the debasement of the dollar and other major currencies that's to blame for its soaring cost, says James Turk. To find out why if central bankers continue with their present policies, 2008 could mark an eighth year straight of gains for gold, see: Can gold continue its seven-year winning streak?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.