Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.
Energy planners in the U.S. have to be sitting in their offices right now shaking their heads, wishing we had discovered a high-tech alternative to oil decades ago. That’s because not only is oil presenting a bewildering picture these days, the critical nations we depend on for its production are as well. In fact, to quote Paul Erdman from CBS MarketWatch, “The looming oil crisis will dwarf 1973.”
For investors, though, the real news here – the real opportunity here – is the low gold-to-oil price ratio. If this tells us anything, it’s that gold is seriously undervalued and set to rise to get back in line.
Before reviewing that, though, here’s an overview of the troubled world oil scene.
Overestimating Iraqi oil
You’d think by now that, given a Hussein-free Iraq, there’d be much more stability with Middle East oil. But, sadly, it just isn’t happening.
The biggest Iraqi oil threat is the instability of that fledgling government. With three contenders for power in Iraq – the martial cleric al-Sadr, the Grand Ayatollah Ali al-Sistani and Iraqi Governing Council member Ahmed Chalabi – there’s a very real possibility that, given a U.S. transfer of power, Iraq will simply boil in civil war for years, maybe decades, to come. Should this happen, should the anticipated Iraqi oil production falter, it alone could send oil to $60 a barrel.
But even if governmental stability comes to Iraq, there are no guarantees that terrorism will cease. Case in point: A late April terrorist attack on the Persian Gulf oil terminal (which controls 90 percent of Iraq’s crude oil exports) temporarily shut down this critical facility. And this has led to a re-thinking of what Iraq can contribute to the world’s oil inventory.
First it was thought to be 3.5 million barrel a day – those optimistic assessments have already been shelved. It’s now a wait-and-see situation. This is reflected in the fact that $20 billion committed to repairing Iraqi oil facilities has just been canceled. As Paul Erdman wrote in his CBS article, “The sad truth is that in the foreseeable future Iraq will supply less crude oil to the world market than it did before the war.”
Cracks in Saudi Arabian stability
In the past few weeks alone, there have been unprecedented terrorist attacks in formerly secure Saudi Arabia. For example:
- Gunmen went on a killing spree in a key, Swiss-run Saudi petrochemical plant, killing five foreign workers.
- The terrorists then dragged an American corpse through the streets while shooting at such Western icons as McDonald’s and Holiday Inn.
- A bomb exploded at an international school.
- There have been running gun battles between extremists and Saudi security forces over the last month.
This violence has already had a serious consequence: The U.S. ambassador to Saudi Arabia urged all U.S. nationals to immediately leave the country, because neither the Saudis nor the U.S. could guarantee their security. “This represents a retreat by the United States of historical proportions,” wrote Erdman.
Saudi Arabia represents 10 percent of the world oil output. Should the Saudi Royal Family ever be deposed, as is the devoted intent of Muslim extremists, the consequences to the world oil scene would be unimaginable. The Wall Street Journal recently quoted Larry Goldstein, president of the Petroleum Industry Research Foundation, as saying that a disruption of Saudi oil supplies is “one event to which no one has an answer.”
Fueling the ‘Industrializing East’ and the Industrialized West
Analyst Adam Hamilton probably best summed-up a new oil dilemma facing the world:
“The great nations of Asia, primarily the giants China and India, are growing rapidly and need to vastly increase their energy consumption to build out their infrastructure and bring their lifestyles closer to Western standards. And since much of the world has already been explored for crude, there just is not enough new oil coming online to feed both the industrialized West and the industrializing East.”
These New Industrial Countries (NICs) include China, India, Pakistan and Brazil, and their emerging energy demands will certainly make competition for oil greater than ever.
The surprising gold-oil ratio
Needless to say, the world oil picture is evolving rapidly. In addition to supply-and-demand issues, there is also what’s known as “Hubbert’s Peak” syndrome, a growing belief that world oil production has already peaked and that cheap oil is a thing of the past.
But at least investors can successfully prepare for whatever oil consequences lie in store. Since 1965, the average ratio of the price of gold to the price of oil has been 15.4. That means, until recently, the cost of an ounce of gold averaged 15.4 times more than the cost of a barrel of crude oil.
Given that, if we multiply $41 per barrel oil by 15.4, we get a projected gold price of $631 today. But even if you take a more conservative approach, say $32 per barrel oil for example (which is its 200-day-moving-average), that would still put gold at $493 an ounce, more than $100 over today’s price.
“Any way you want to slice it, in light of gold’s historical relationship to oil, gold is way undervalued at its current levels near $380. Gold is significantly lagging the oil bull and will almost certainly catch up sooner or later here to bring this key gold-to-oil ratio back in line,” wrote Hamilton.
This represents a solid, long-term investment opportunity. That should come as good news for investors who are already weary over higher oil prices, the prospects of rising interest rates and a stock market that just can’t seem to find its way.
Special for WND readers, Lear Financial is making available free information on investing in precious metals.
With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.
