W9_Adi Nugroho_The Gold and The Project


Problem Statement

Fact that the price of gold in 2011 is around USD 1430 per troy ounce would be interesting if we compare to 25 years ago when its price being no more than USD 400 per troy ounce. How significant is the increase of the gold price? What is prediction for the future gold price? How we can predict the future project value with the gold price increase?

Development of alternatives

To figure out the pattern of gold price and forecast to the future, we need to plot the data of gold price from previous years, and analyze the regression.

Analysis of Alternatives

Using the gold price data from http://www.nma.org/pdf/gold/his_gold_prices.pdf, we can obtain:

Year

USD per oz

1985

317

1986

368

1987

447

1988

437

1989

381

1990

383.51

1991

362.11

1992

343.82

1993

359.77

1994

384

1995

383.79

1996

387.81

1997

331.02

1998

294.24

1999

278.98

2000

279.11

2001

271.04

2002

309.73

2003

363.38

2004

409.72

2005

444.74

2006

603.46

2007

695.39

2008

871.96

2009

972.35

2010

1224.53

Then plot it to the graph, and add a best fitting trendline.

 

Seems that the Polynomial Order 3 Trendline is quite fit Since the R value is 0.979 close enough to 1.

Using the equation of polynomial order 3 we can extrapolate the data to forecast the gold price to year 2020.

The following are extrapolated data( from the equation: y = 0.303561217254617x3 – 1,816.111149038100000x2 + 3,621,718.306134750000000x – 2,407,481,471.199230000000000):

Year

USD per oz

2011

1,414.48

2012

1,664.20

2013

1,946.29

2014

2,262.57

2015

2,614.86

2016

3,004.99

2017

3,434.77

2018

3,906.02

2019

4,420.58

2020

4,980.25

From http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx, we obtain the 2011 average yearly gold price until May is USD 1427.55 per oz. The deviation between real data with the extrapolated data 2011 (1,414.48 ) is about 0.92%. So we can confident with the validity of forecasted data.

Implementation to Real Life Project Value

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

The recently approved 13 Km 6” gas Pipeline Project at East Kalimantan Gas Production facility in 2011 is cost USD 7,550,000.

Converting USD to oz of Gold:

1.56 oz per USD 1000,means that the pipeline project at 2011 is worth of 1.56 x 7550 = 11,778 oz of gold.

Then the predicted value of 13 Km 6” gas Pipeline Project at East Kalimantan Gas Production facility at 2020 is worth: 11,778 x USD 4,980.25 = USD 58,657,384.50

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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