W10_Adi Nugroho_Oil vs Gold


Problem Statement

From the previous blog (w9), we have noticed that the price of gold is significantly increase than three decades ago. How about the oil price? What is prediction of future oil price in year 2020? Is the curves of gold and oil are paralel?Does the shockingly increased oil price recently has correlation with the gold price?

Development of alternatives

To figure out forecast to the future, we can applied the forecast model curve of gold price on the current oil price. Other alternative is generate the curve by using the previous data of oil from 1985 and forecast it to 2011. We also can see whether the both curves are parallel or not.

Analysis of Alternatives

 

Refering the forecast model of gold price chart at previous blog (w9)

Year

USD per oz

2020

4,980.25

Implementation to Real Life Oil Price

Gold Price of a Constant Value “CPI Basket” using data from year 1970

 

Ounce per USD 1000

series 1

series 2

series 3

series 4

series 5

1.42

2.08

0.62

2.98

0.69

ULC

4.54

Sigma +2

3.54

Sigma +1

2.55

Mean

1.56

Sigma -1

0.56

Sigma -2

0.00

LLC

0.00

 

Statistic Parameters

Value

Best Case

1.75

Mean

1.56

Most Likely

1.56

Baseline

1.75

Worst Case

4.54

Difference

0.19

Mean

1.56

Std Dev

0.99

Sigma

0.99

Difference/ Std Dev

0.19

p50 factor

0.00

p50

1.56

Using the average oil price in 2011 from US Energy Information Administration, we obtained the oil price is USD 106.92

Converting USD to oz of Gold:

1.56 oz per USD 1000, equal to 0.00156 oz per USD 1. The oil price in oz equal to 0.00156 x 106.92 = 0.166795 oz

Then the predicted value oil price at 2020 is: 0.166795 x USD 4,980.25 = USD 830.7…………………(1)

Using the previous years data of oil price:

Year

USD per bbl

1989

13.58

1990

18.91

1991

24.72

1992

16.22

1993

14.71

1994

12.37

1995

16.63

1996

19.61

1997

18.20

1998

11.76

1999

17.06

2000

27.04

2001

22.74

2002

23.47

2003

27.11

2004

34.64

2005

49.63

2006

60.41

2007

69.04

2008

95.31

2009

60.26

2010

77.46

2011

106.92

 

The regression is fitted by Polynomial order 3 with R value 0.904. Using the equation of polynomial order 3 we can extrapolate the data to forecast the oil price to year 2020.

The following are extrapolated data( from the equation: y = 0.00506131769197 x3 – 30.05137057587460 x2 + 59,472.74272267360000 x – 39,230,522.17962910000000):

Year

USD per oz

2012

113.6977

2013

127.0576

2014

141.4453

2015

156.8913

2016

173.4258

2017

191.0793

2018

209.8821

2019

229.8646

2020

251.0572

From the above, we have a predicted future oil price 2020 at USD 251.06…………….(2)

Now it’s clear that on 2020, the oil price based on gold increment (1) has a different value than the oil price extrapolated data (2). From this result, we can say that the both curves is not quite parallel, even they are both have increased prediction. The gold price has steeper curve than the oil price. That’s why if we saving our money in the form of gold, would become a reasonable decision these days.

Interesting Fact!!!

To figure out the correlation between oil and gold price,

Year

USD per Troy Ounce Gold

Ounce Gold per 1000 USD

USD per Barrel Crude Oil

Barrel Oil per 1000 USD

Barrel Oil per Ounce Gold

1989

381

2.62

13.58

73.64

28.06

1990

383.51

2.61

18.91

52.88

20.28

1991

362.11

2.76

24.72

40.45

14.65

1992

343.82

2.91

16.22

61.65

21.20

1993

359.77

2.78

14.71

68.00

24.47

1994

384

2.60

12.37

80.84

31.04

1995

383.79

2.61

16.63

60.13

23.08

1996

387.81

2.58

19.61

50.99

19.78

1997

331.02

3.02

18.20

54.94

18.19

1998

294.24

3.40

11.76

85.02

25.02

1999

278.98

3.58

17.06

58.61

16.35

2000

279.11

3.58

27.04

36.98

10.32

2001

271.04

3.69

22.74

43.97

11.92

2002

309.73

3.23

23.47

42.61

13.20

2003

363.38

2.75

27.11

36.89

13.41

2004

409.72

2.44

34.64

28.87

11.83

2005

444.74

2.25

49.63

20.15

8.96

2006

603.46

1.66

60.41

16.55

9.99

2007

695.39

1.44

69.04

14.48

10.07

2008

871.96

1.15

95.31

10.49

9.15

2009

972.35

1.03

60.26

16.60

16.14

2010

1224.53

0.82

77.46

12.91

15.81

2011

1427.554

0.70

106.92

9.35

13.35

From the above graph we can say that even the oil price is increasing, the ratio of Barrel Oil per Ounce Gold is relatively stable, means that if the oil price increase, the gold price also increase. It’s because the increase of oil price is driving inflation high. The price of gold reflects the expectation of the level of inflation. Gold sought at times erratic. Hence if there is an increase rate of inflation, the demand for gold increases that caused the high price of gold in the market.

The above thing should get attention from government of Indonesia, the country that has a world largest gold mine, to strengthen the national gold reserves. And manage the national mineral resources for the benefit and welfare of People of Indonesia, than to enrich some foreign companies.

Performance Monitoring & Post Evaluation of Result

The forecast model is based on assumption of do-nothing scenario, means there is no intervention by government on gold price, and its driven by market value and inflation only. Otherwise it will be need more adjustment to obtain a valid model and value.

References

Brassard, Michael & Ritter, Diane (2010), The Memory Jogger 2nd  edition, Tools for Continuous Improvement and effective planning, Canada:GOAL/QPC.Sullivan, William

G., Wicks, Elin M. & Koelling, C. Patrick (1942), Engineering Economy15th Edition, Singapore: Prentice Hall, Inc.

http://seekingalpha.com/article/262560-using-history-to-determine-gold-s-intrinsic-value

http://www.eia.doe.gov/dnav/pet/PET_PRI_WCO_K_W.htm

http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

http://www.nma.org/pdf/gold/his_gold_prices.pdf


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5 Responses to W10_Adi Nugroho_Oil vs Gold

  1. Pingback: W9_Candra Nugraha_Control Chart for Oil and Gold Price | AACE Indonesia

  2. DrPDG says:

    Absolutely AWESOME, Adi!!! Very well done!! You even took this beyond Candra this week!! Nice work!!!

    Now my question to you, is say you had a 4 year project and were trying to conduct a feasibility analysis. The first thing you would do is project the INFLATION costs of the project forward based on the price of gold (How many ounces or lbs is your project worth) Then you would calculate the PW (NPV) of those cash outlays back to today’s dollars, using either MARR or WACC.

    The next step would be to do the same to the price of oil, to determine the REVENUE STREAM once the project comes on line (year 5 to year 25 or whatever)

    THEN you would have a much more reliable project feasibility analysis, based on the commodity price, rather than based on the projected increases in labor, materials and equipment, which is valid data, but much wider upper and lower control limits.

    I hope you and Candra will take some time to meet up with David and Bu Lilly as both of them seem to be struggling with this and the two of you seem to really have this mastered.

    Thanks and keep up the good work!!!!

    BR,
    Dr. PDG, Jakarta

  3. Pingback: W10_Candra Nugraha_Cash Flow Analysis (2) – Gold Price | AACE Indonesia

  4. Pingback: oil price » Images Search

  5. Jim says:

    hum!!! wondering if the article owner went “BUY” on all of the instruments mentioned on this page !
    oh one more question ! is he/she still alive ?

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