Year-End Leap in Oil Price Could Bode Well for Gold in 2009

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". . .rise in oil price is not necessarily a formula for huge gold price gains, but sufficient to give the gold mining sector a good fillip and bring selected gold mining stock prices back to their peak levels."

Oil, and to a lesser extent gold, recorded a strong price surge on the final day of the year, which could be bad news for the U.S. dollar, but positive for precious and base metals at the beginning of 2009.

OPEC would like to see the oil price back to $100 a barrel and certainly has the muscle, if perhaps not the will, to continue production cuts until this is achieved. Longer term the peak oil scenario, which sees production potential reaching a maximum followed by a serious decline, if correct, would suggest a continuing high oil price environment from late in the next decade, though timing of the 'peak' is open to argument.

But if stronger oil prices could lead to a weaker dollar (its strength further eroded by the huge increase in money supply being pumped into the economy by the government trying to avoid prolonged recession) and a weaker dollar generally means a stronger gold price.

$100 oil would probably mean on balance $1,000 gold going on historic ratios—so the potential (probable?) rise in oil price is not necessarily a formula for huge gold price gains, but sufficient to give the gold mining sector a good fillip and bring selected gold mining stock prices back to their peak levels. But the market is likely to be much more sophisticated in its analyses of gold stock values having had its fingers burnt badly in the past year so it will be important to pick stocks that boast underlying strength and strong finances.

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