Trend: The drop in oil and gold prices appears to be a short-term correction if forecasts of long-term demand are accurate.
Jim Jubak at MSN Money describes why the drop in energy and precious metals is short term.
Link: How to invest when trends zig and zag - MSN Money.
No matter whether you're a technical or fundamental investor, a short-term trader or a long-term buy-and-holder, a top-down Big Picture student or a bottom-up stock-picker, the Wall Street advice is the same: The trend is your friend.
But how do you go with the trend when the financial markets themselves are serving up contradictory trends?
Energy...
In the short term, between October and the end of the year, I can see a bounce in the prices of stocks in the energy sector if oil prices stabilize after their 17% plunge from a record $78.40 a barrel on July 13 to $65 on Sept. 12.
But in the intermediate term -- that is, out until the end of 2007 -- I find it hard to see a resumption of the rally in this sector until prices have muddled along at something like current levels for a while. The sector needs to build a base at these prices before it can begin another leg up. In the intermediate term, possibly as far out the end of 2007, the energy sector doesn't deserve to be over-weighted in my portfolio any longer.
Long term, however, the trend is totally different. The International Energy Agency sees oil demand growing by 1.6% annually over the next 25 years. That may not sound like much, but that 1.6% annual growth adds up to a 50% increase in world oil demand by 2030. Oil demand, which the agency projects at 92 million barrels a day by 2010, would hit 115 million barrels a day by 2030.
The International Energy Agency believes supply will grow to meet that demand -- if the world's oil producers can come up with $17 trillion to invest in energy production (in constant dollars) by 2030. That money is needed to find new oil, develop already discovered reserves, recover more oil from existing fields, and build new refineries, pipelines and storage tanks. If the capital isn't forthcoming, you can count on the price of oil going higher from today's nosebleed levels.
One thing I like about this trend for the long term is that if the International Energy Agency is right, investors in energy stocks will make a lot of money over the next 25 years.
Gold...
Gold has followed right along as the metal has become a way to hedge the same global risks that drive oil prices up and down. The price of gold has been very closely correlated with that of oil over the last five years with gold up 114% in that period and oil up 121%, according to The Financial Times.
And I think this correlation between these sectors is likely to continue for the short-term. CIBC, for example, projects a fourth-quarter rally in gold as the market bounces off over-sold technical levels going into the year-end and as traditional demand for gold from fall Indian wedding season kicks in. But the investment bank is looking for something like an 8% to 10% rally. That counts as a bounce in my book. Gold could then take a rest for 2007 if oil does.
The long-term trend is much stronger. Increases in gold supply are simply not keeping up with increases in demand from the developing markets of China and India. Gold, too, is likely to get a boost from buying as an inflation hedge as the aging populations of the developed world push government budgets into severe deficit and lead to inflation in the economies of the U.S. dollar, Japanese yen and euro in the period from 2010 to 2030.
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