I heard this on the television but I can't find the link to the Bloomberg article despite it appearing on the "most read". First Gartman and now "You and Us" are going against me. What rigorous analysis did the UBS analyst do in order to derive these numbers? Is this the same analyst who has the $550 price target on google since March? Maybe this is the analyst in charge of the tax evasion department, or MBS.
I'm not going to sit here an try to tell you price objectives for the yellow metal. There are plenty of sites that will tell you exactly where gold will go, and if it doesn't, it's because of manipulation (Financial Sense). Keep in mind most of these saw $1200 gold by now before the dollar repatriation derailed the commodity train.
Back to the $20 oil and $300 gold... This $20 oil number is logical. We were there only 6 years ago and gold was just ~$450/oz during the same time. Using a few numbers I did some quick 'back-of-the-toilet-paper' math to see how the gold target was derived.
Knowing the target for oil, and the 40 year Gold/Oil ratio average of 16.50 we can now solve the puzzle:
G = O * R
G = $20 * 16.50
G = $330
I'm not saying this is how they derived their figures, but it wouldn't surprise me in the least. How can you can pull $300 out of your ass?
Here are the problems with this. First he's calling for a %50 drop in oil (used $40 to be fair) and over a 60% drop for gold. Wtf? So according to this guy, oil will outperform gold, or at the least move hand-in-hand. Wrong answer. Here is the problem with that. Over the last 6 years the Gold/Oil ratio averaged just 8, half of the 40 year average. Where does it need to be in order to maintain the long-term trend? Ok, so this isn't enough to make you want to buy gold alone because if oil did go to $20 and we use a 30 multiple that puts gold at $600. And honstly every time I look at a long term chart on gold I see that same $600. Ok, so that would be bearish for the metal from where it is now. So why am I wasting all this time blathering on gold? Frankly I don't know where gold is going to be 6 months from now, and it would be silly pretend I do (Like the ubs guy). However, what I can tell you is that I'm 100% bullish on gold versus oil. This is to be viewed as one trade, not two.
My strategy has been simple: dollar for dollar, long gold and short crude. I intend to maintain this position for at least another year, or until it's force liquidated, whichever comes first ;-) I use the futures market for this position but you could also use the GLD/USO or some other vehicle to duplicate this.
Now the are times when I might alter my exposure on one side or the other either through EuroDollar futures or energy stocks, depending on what the market is doing.
It's quite possible I could end up being wrong. I have no problem looking stupid in front of people, I do it all the time.
