Why the Oil and Gold Rally Won’t last

Oil and gold are near all-time price highs and current world events and economic conditions suggest that they will continue to soar for the indefinite future. Investors should be cautious, however, because the rally in those key markets will not last forever, according to a CNN report (http://money.cnn.com/2011/03/07/markets/commodities_oil_gold_predictions/index.htm).

In attempt to quell anxiety over the markets, the story suggests that the prices of both commodities will settle below their highs but will remain above prices that were in place prior to the current crisis in the Arab world.

Based on a survey of financial analysts, CNN Money has estimated likely prices for oil and gold at the end of the year, forecasting that current price spikes are just temporary irregularities.

Oil prices

Expert opinion about oil prices centers on the fact that no current supply problems exist. Because of this, once the volatile Middle East cools and returns to a steady state, prices will return to levels that the market will support.
This conclusion, however, could be flawed because there is no guarantee that the violence in Arab countries will subside.

Supply problems could easily develop if violence continues. Bad news for supply such as this week’s targeting of Libyan oil infrastructure by Gadhafi forces in Libya, and the oil pipeline bombing in Iraq could easily send oil skyrocketing to levels high enough to knock out Western economies, creating problems far more consequential than analysts currently foresee.

Another factor affecting oil prices is government policy. Many interpret the words of Obama and the actions of his regime as supporting elevated oil prices to make alternative energy options more competitive. Because of this, American oil production may continue its sharp decline, creating supply issues that will prop up extraordinary price points.

Gold prices

Economists see investors fleeing to gold as a safe haven immune from reckless government fiscal policy. Those surveyed by CNN Money appear to believe that current fears over the deficit and the economy will be short lived.
However, as the American national debt continues to increase faster than ever and the Quantitative Easing policy of the Federal Reserve appears to devalue the US dollar, speculation that demand for gold will soften may be premature.

As the world moves away from the US dollar as its reserve currency, demand for gold will likely escalate as investors look for ways to insulate themselves from the possibility of economic collapse.

The truth is that unknown factors may come into play that can send oil and prices either up or down. Investing is risky business, and so is life.