Will Gold Glitter Or Fizzle In 2016? (Part 4)

When it comes to oil prices, it’s been a brutal 12-18 months for any oil investor. In the past I have written why these oil prices won’t last, as 2/3^rds of future oil reserves are uneconomic at a price of $60 dollars a barrel. If you combine this with the fact that capital spending budgets are declining rapidly for this upcoming year in 2016, this will make production declines inevitable. 

But currently, most oil and gas pundits believe that production will still remain strong despite a very low rig count, due to technological advances in drilling. Most believe that with production still remaining over 9 million barrels of oil per day for the year 2015 that production will remain stubbornly high. What they ignore is the fact that, most producers had oil hedges on their books dating back to 2014. In my opinion, this is why oil drilling remained stubbornly high for the year 2015.

With hedges expiring next year, combined with the fact that oil prices are now trading in the $30 to $40 dollar range, these companies wanted to pump as much oil as possible from existing wells in order to get its $80-90 dollar hedged price in the year 2015. This is why I think oil production still remained high for the year 2015. Next year, oil producers will have to come to terms with the reality of $30-$40 dollar oil, thus leading to a decline in production. 

So the question that you might have now is, why does this matter if you are a gold investor. The answer is simple. In the last CPI report, it stated that a declining index of food and energy prices offset an increase in other CPI items. I believe that oil will bottom this year due to a decline in production, and combine that with the fact that worldwide demand is still increasing, I believe that the oil price will finally start to increase. This will in turn increase the CPI as oil will start rising in perpetuity with the other rising items in the CPI (barring no formula change). This will cause the CPI to rise faster, even faster than the rate of interest rates, and then, real interest rates  will start becoming negative again, or at least start declining in real terms; thus starting a new bull market in gold, perpetuated by an increase in oil prices.

Why a stock market crash won’t cause a large sell off in the Precious Metals or the mining shares

Recently, there has been quite a bit of chatter about the possibility of a stock market crash occurring in 2016. When precious metal bulls hear the words stock market sell off, some of them quiver with fear over the fact that the metals will decline with the general markets, like it did in 2008. Now I am not sure if the stock market will crash in 2016 or not, but I do believe if it does, I do not believe that gold will decline with it this time, like it did in 2008. The main reason is, that institutions and hedge funds, are now net short gold. In 2008, hedge funds were net long gold. If a stock market crash does occur this upcoming year, gold could actually rise, due to margin calls that would occur, and as a means of raising cash for that margin call, these funds might decide to cover their short positions in the precious metals sector, thus causing a short covering rally in the price of gold and even the mining shares.

It’s an Election year 

Even though I believe that gold will put in a bottom and start rising in 2016, I do not believe that gold will start rising rapidly until after 2016. The reason being is, during the last election, Bernanke announced QE3 in September of 2012, as means of propping up the stock market. Shortly after that announcement Mitt Romney spoke out against QE. I believe that due to the fact that markets are forward looking, that this uncertainty or false uncertainty created by both political candidates, will prevent any type of large price movement in any direction, until the next year. 

This election cycle I expect more of the same. Whichever Republican wins the nomination, will probably talk against the Fed and its easing programs. Rather their talk is just talk or real talk, it will cause uncertainty in all the markets like it did in the last election, thus generating only a sideways movements like what happened during the last election, in 2012.