Instead of oil, however, the drill bored into a massive deposit of natural gas. All that hard work and expense for a disappointing find of natural gas.

The price of oil is a function of many things, but as with all economic issues its prime mover is demand. Demand for the past 18 months has been dropping due to the economic meltdown worldwide. This has made for great energy prices, but it’s like a warm day in January in Canada.  It’s not real and anyone who has ever lived through a northern winter knows it will not last.

Why?

First, the world is coming out of this recession and oil demand is about to explode and we, the USA, the biggest energy pig in the world, have done nothing to prepare for it. We have less of an ability to provide for our energy needs now than we did 35 years ago.

Second, Asia and the rest of the developing world are coming out of this worldwide slow down, too. Consider how much more oil will be going to Asia and the developing world as they rebound and start to suck up what’s left of the world’s capacity to produce black gold. The demand picture really begins to come into focus.

Third, the current effort of the Obama administration to avoid a depression by pumping trillions into the economy has worked. We are soaring out of the hole faster than anyone could have imagined a year ago. At the same time we are doing so with no way to fuel it, literally fuel it.

We are completely unprotected from the threats to our economy and future well being that comes from importing 75% of our oil.

Fourth, there has been zero new development of oil reserves partly because of a very admirable effort by the Obama administration to shift to clean renewable energy. Clean and renewable is great, but we have about a ten year gap that has to be filled with oil before we can make that a reality.

Fifth, a dysfunctional congress whose priorities are their careers, their party, their district and whatever is left over goes to the well being of this country, in that order. Congress is all but incapable of working toward a long term solution to the problem.

Add them up and we have all of the necessary elements for the biggest rise in oil prices in our history over the next three to five years. Here’s how we can make money on this mess.

DXO, Power Shares Deutsche Bank Crude, or DIG, Ultra Oil and gas Pro Shares, both are designed to give you twice the percentage return of any increase in the price of oil. In the past month or so DXO bottomed at about $1.90 per share and ran to about $3.20 on just a $12 dollar move up in the price of crude. That’s a 68% move. DIG has had a similar neck snapping rebound.

If oil only goes to the $75 range, which is a given at this point, the DXO and DIG stand to move another 130%. The money we can make here is mind boggling.

The best part of this play is that it is inevitable. The chances of oil not moving up in price are almost zero.

You will only get a few opportunities like this in your investing life. Think of all the times you looked back at the market and thought how great it would have been if you had put money in at the bottom. This is the bottom!

As always time is the key to the success of this recommendation. A move to $75 a barrel is very likely by the end of this year, but the big money could be several years out. Give this time to work and you won’t be disappointed.

100% plus this year is just the beginning of this move.

Source: Retire Early Compliments of OPEC

The Reuters/Jefferies CRB Index of 19 commodities has fallen more than 54% from its July peak and is now at its lowest level in six years. Oil spearheaded the decline, with light, sweet crude for January delivery dropping $2.36, or 5.4%, to settle at $41.31 a barrel on the New York Mercantile Exchange Friday. Black gold has tumbled 71% since peaking at a record high of $147 a barrel in July.

Actual gold is down 27% from its record high of $1,032 an ounce, reached in March. Prices for other commodities such as copper, zinc, platinum and corn have shared in the decline as well.

“Everybody is just trying to get out of the markets,” Michael Aronstein, president of Marketfield Asset Management, told Bloomberg. “People are exiting as fast as they can.” Everybody except Jim Rogers, that is.

“Commodities will be the place to be if and when we come out of” the recession, Rogers said an interview with Bloomberg. “The only thing where fundamentals are unimpaired are commodities.”

Rogers reasons that underinvestment will lead to a supply crunch in commodities that will send prices soaring.

“Farmers cannot get loans for fertilizer now. Nobody can get a loan to open a zinc mine,” he said. “So we are going to have some serious, serious supply problems before too much longer.”

In an interview with Money Morning earlier this year, Rogers pointed to a lack of investment and production in the energy sector as a main reason for oil’s run-up in price.

“Every oil country in the world has declining reserves except Saudi Arabia,” Rogers said. “And I know that every oil company has declining reserves.  So unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.”

Now that the global recession has stomped down crude prices, oil companies no longer have the incentive or the funding to develop new sources. Earlier this year, for instance, ConocoPhilips (COP) and Saudi Arabian Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000-barrels-per-day (bpd) export refinery at the Yanbu Industrial City.

“We see and hear about energy investments being delayed… This is a major worry and could lead to a supply crunch and much higher oil prices than we’ve seen before,” Fatih Birol, the International Energy Agency’s (IEA) chief economist, told journalists in London last month.

The IEA says oil demand will rise 1.6% a year on average between 2006 and 2030. That means demand will rise from the current level of 85 million bpd to 106 million bpd.

To meet that demand, the agency estimates the world needs $26.3 trillion in supply-side investment over the next 21 years. About 7 million bpd of additional capacity needs to added to the market by 2015, the agency said.

Gold is another commodity that could make another record-breaking run.

Demand for the yellow metal actually increased by a record 45% from the second quarter to the third this year.

“I own some gold,” Rogers told Bloomberg. “And if gold goes down I’ll buy some more and if gold goes up I’ll buy some more. Gold during the course of the bull market, which has several more years to go, will go much higher.”

Investment Guru Jim Rogers Says Commodities are the ‘Place to Be’ Despite Their Decline

• South Korea’s government announced plans for a 14 trillion won ($10.8 billion) economic stimulus aimed to create an extra 200,000 jobs, extend tax breaks for factory investments and increase infrastructure spending and development. Relief measures announced this year now total 33 trillion won, according to the finance ministry, Bloomberg reported.

• Initial public offering plans for buyout firm Kohlberg Kravis Roberts & Co. have again been delayed, this time because its Amsterdam-listed affiliate suffered big investment losses. With KKR’s delay, there hasn’t been a U.S. IPO in nearly three months, Reuters reported.

• DryShips Inc. (DRYS), Greece-based dry bulk ships carrier, posted a 71% gain in quarterly profits. The company dodged the cash drought by employing its vessels for long-term contracts, securing revenue as most companies are losing it, Reuters reported.

• Oil prices fell nearly 6% yesterday (Monday) as weak demand continued to drive investors from the market.  Light, sweet crude fell $3.90, or 5.75%, yesterday to settle at $63.91 a barrel. Black gold has plummeted nearly 57% from its record high of $147.27 a barrel reached in July.

• The Institute for Supply Management said yesterday (Monday) that its manufacturing index fell to 38.9 in October – the lowest reading since September 1982. Manufacturers have been crushed by mounting job losses and weak consumer demand.

• Viacom Inc. (VIA) announced yesterday (Monday) that third-quarter profit fell 37% from a year ago even though revenue rose 4% to $3.4 billion. Net earnings fell to $401 million, or 65 cents per share, down from $641 million, or 96 cents per share last year. The loss was largely the result of a $19 million operating loss in “filmed entertainment.” Viacom is parent to Paramount Pictures.

• October sales for General Motors Corp. (GM), Ford Motor Co. (F), Toyota Motor Corp. (TM), Honda Motor Co. (HMC) and Nissan Motor Co. (NSANY) all fell in the midst of tighter credit and a weaker global economy. GM sales of cars and light trucks fell 45% from last year. Ford down 30%. Toyota slipped 23%. Honda skidded 25%. And Nissan sales dropped 33%.

Source: Global Investing Roundups Tuesday, November 4th, 2008

Martin Hutchinson in Money Morning blames Fed inspired inflation and speculators:

The reason for this intense advance in commodity prices is that the Fed and its European counterpart have been pumping money into their respective economies to prevent the collapse of several major banks. The St. Louis Fed’s “Money of Zero Maturity” (the best broad money-supply measure left over since the central bank stopped reporting M3 money-supply statistics in March 2006), is up at an annual rate of 17.6% during the last six months. In Europe, Euro M3 is up at an annual rate of 10.8% during the same period – still double the growth seen in nominal gross domestic product (GDP).

In the key emerging markets, the money supply has been rising even faster – 19% in China over the past year, and 21% in India. Not surprisingly, those countries’ inflation rates are taking off, with India into double digits and China quickly getting there.

He goes on to say:

It’s fairly clear to me that concerted speculation by hedge funds and pension funds is what’s been pushing up oil prices. But that may be playing out – and reaching its limit – as the huge price increases we’ve seen in “black gold” over the past year is finally dampening consumer spending both here in the United States and in other key markets worldwide…

Dave Gonigam in Daily Reckoning sees oil supply as the problem:

…Oh, and those darn speculators. OPEC loves to blame them, and has blamed them, going at least as far back as $92 oil eight months ago.

BP (NYSE: BP) chief Tony Hayward is having none of that, calling the notion of speculators driving up the oil price a “myth.” More relevant, he told the World Petroleum Congress, is that “supply is not responding adequately to rising demand.” But then Hayward goes off the rails when, according to Reuters:

He added that politics rather than geology was the reason. “The problems are above ground not below it,” he said.

Now it’s true enough, as Hayward complains, that OPEC nations don’t like having Western oil majors like BP working OPEC oil fields the way they did in decades gone by. But the fact oil-rich nations are giving BP less access than they used to doesn’t change the fact that the world’s biggest oil fields are in decline, and new ones aren’t coming online nearly fast enough to pick up the slack. I can understand why OPEC doesn’t want to fess up to that reality, but why is Tony Hayward so reluctant?

Surely, these three factors of inflation, speculators, and lagging supply are the primary causes of rapidly rising prices. But, will any of these factors fall off or fade in the near future? Speculation is most likely to wain according to Hutchinson. Demand may well slump with consumer spending, but inflation will likely worsen… Bill Bonner says:

Talk is cheap. It’s action that is dear. And the action the Fed needs to take – raising rates – will be so potentially costly for the lame U.S. economy that Bernanke and Co. are afraid to do it. They’re hoping inflation will go away so they can continue the battle against the slump, without having to worry about their unprotected flanks. Most likely, they will make a gesture towards raising rates – perhaps a quarter of a point. But then, when the mob starts howling for his head, Ben Bernanke will drop them again.

It’s evident that the Fed does not have the will or the tools to ward-off looming inflation. With inflation eating your dollars and commodities most likely set to rise higher, there are still many opportunities to profit…

Implications

Martin Hutchinson says:

Investing in the late stages of a bubble is highly speculative. Nevertheless, I reiterate my prediction of a few months ago that gold will reach $1,500 an ounce. Even if the Fed begins to act against inflation in August, it is very unlikely that its initial actions will be effective. Don’t forget that in the last great inflationary bubble of 1980, gold hit a level that’s the equivalent of $2,300 an ounce in today’s money.

I would consider SPDR Gold Trust (formerly StreetTracks Gold Trust) shares (GLD) about the most efficient way of getting a pure gold play. As an alternative, you might consider a silver investment: The metal is currently trading at less than 15% of its 1980 high, the equivalent of $130 per ounce. If that’s a move you like, the iShares Silver Trust ETF (SLV) seems the best way to play silver directly.

Also see other commodity ETFs such as:

S&P GSCI(TM) Commodity Indexed Trust (GSG)

PowerShares DB Agriculture (DBA)

Market Vectors Global Agribusiness (MOO)

Retail gas hit its 22nd consecutive daily high yesterday (Thursday), according to AAA’s Daily Fuel Gauge Report.

The average nationwide cost for a gallon of regular unleaded was $3.952, while the average cost for a gallon of diesel was $4.787.

According to the AAA survey, gas prices have increased nearly 10% from a month ago and are up almost 24% from one year ago, CNNMoney.com reported.

Connecticut has the highest average by state at $4.223 for a gallon of regular, while Missouri has the lowest at $3.761.

The average cost of gas has crossed the $4 threshold in 11 states and Washington, D.C.

The cost of gas has climbed steadily higher, following in the wake of soaring oil prices. Oil reached a record high of just above $135 per barrel on May 22, but since then the price has dropped.

Crude oil for July delivery fell $4.31, or 3.3%, to $126.72 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange, according to Bloomberg data, as the high cost of gas is finally acting to curb consumer demand.

“There’s a lot of demand destruction taking place,” Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York, told Bloomberg News. “We are probably headed for $120 in the near term.”

But the slight reprieve we’re currently experiencing is likely to reverse itself just as quickly as we head into the summer driving season and speculators continue to push up the price of “black gold.”

Both Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) recently released reports that have oil soaring over $200 a barrel within the next two years.
Money Morning Investment Director Keith Fitz-Gerald – one of the first investment gurus to predict triple-digit oil prices – has boosted his own target, suggesting that oil could go as high as $225 a barrel.

“The math is really simple here,” Fitz-Gerald said in a recent e-mail interview from China. “We are burning through supplies at a rate that’s four times to five times faster than we’re discovering new reserves. Throw in a few [surprises]… perhaps a terrorist event… and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices.”

Source: Gas Prices Roar to a New Record for the 22nd Straight Day

Not only is he forecasting higher and higher prices for black gold, but he’s also putting money into new oil companies.

According to the 13F Disbursement Plan, Pickens just bought Sandridge Energy Inc. (SD:NYSE) in the first quarter of 2008. It just went public in late 2007.

So far, it’s been on a solid run, returning an 83% gain in only four months. But it’s still cheaper than the major oil companies like BP and Exxon Mobil.

Sandridge is based in Oklahoma. It looks for natural gas and oil reserves in Texas and drills for other companies. It also provides CO2 to third-party oil recovery projects.

After an initial buy in the first quarter of 2008, I anticipate Pickens buying more and more of this oil company at its still low price of $55 per share. The safest way to invest in oil is to follow Pickens’ picks… especially since this expert says oil is going to $150, far from its current level near $130 per barrel.

Ann Sosnowski

Editor, Safe Haven Investor

U.S. Government Unlocks $35 Billion in “Free Money” Payouts to American Citizens!

The “13F Disbursement Plan” offers you a fantastic wealth-building opportunity with very little risk. It’s safe, simple and, best of all, generates lots of income.

Read on and learn how you can get your share of “free money”…

Source: Follow T. Boone’s Oil Pickings!

But if you must know, global demand is outpacing supply – though not by much. Only a couple of million barrels a day prevents supply from keeping up with demand, but that’s enough to push the price of crude to record prices.

Ah, life must be good in the oil patch. Companies are making record or near-record profits. Don’t look now but the good times may be coming to an end for the miners of black gold.

We’ve already addressed in an earlier article the number one problem of oil companies: raising production. It’s a losing battle. The best fields are past their prime. Once they’re gone, they’re replaced with smaller fields with harder-to-get oil.

It’s like the Boomer generation looking for the fountain of youth. Boomers can slow down the decline here and there. But the fall from grace is inevitable. Oil producers face the same predicament. They can only see maximum rates of oil production in the rear view mirror.

So, what does the other side of oil production look like? It could be worse. So far, falling production plus soaring prices have brought oil companies huge profits.

The oil companies know they’re thriving on borrowed time. And they’re trying to do something about it. Ideally, they’d like to raise production. But at the very least they’d like to find a way to slow the fall of crude output.

To do so, they’re going after oil that a decade ago was beyond their reach. It lies thousands of feet underneath the oceans of the world.

This is new territory for the oil companies. It’s much too early for the oil companies to have a firm idea of what their costs will be. And while they’re pretty sure they have the technology to get to this oil, they’re still not sure how these technologies will work together.

Here’s a snippet of an earnings call by an offshore drilling contractor I caught last week on this very subject.

Analyst
“… the issue associated with the debate out there of drill ships versus semis, is the 8500 series equipment capable of something like offshore Brazil, would there be modifications required? Is there deck load issues? Just expand on the pros and cons and how much more opportunity when people debate this drill ship versus semi?”

Jeff Saile - SVP Operations
“Why don’t you ask a hard question, Pierre. Certainly we can work offshore Brazil. I don’t know if — I think there’s, a lot of that’s to be understood in the future. I certainly think the 8500 can get in there and compete. I don’t think it’s going to compete with a drill ship. It’s going to come in behind these ships when they do some of this. Some of these ships are going to do advanced exploration … the 8500 is certainly equipped to drill. It can drill in 10,000 feet of water. We’re going to have to do minor modifications to it. We’re reviewing that now. It can certainly drill in deeper water. And we can get out there with the equipment on them and drill these ultra deep wells, as well.”

The semi’s they refer to are semisubmersible rigs. They’re floating offshore drilling units with pontoons and columns. They can be anchored to the sea bottom with mooring chains or dynamically positioned by computer-controlled propellers or “thrusters.”

It’s not just the desperate oil majors who are willing to wade into these tricky deep waters. State-controlled oil companies see these basins as their next big money maker.

Deep-sea drilling is the next frontier. And these semis will help make it happen.

They have plenty of drilling to do … in the 30 billion barrel (from early estimates) Tupi basin off of Brazil … to Chevron’s estimated 15 billion barrel discovery in the Gulf of Mexico … to China’s recently discovered offshore field containing perhaps 2.2 billion barrels .. plus others.

These are major reservoirs. If the preliminarily estimated numbers hold up, Brazil’s Tupi would be the third largest underwater oil find ever.

But there’s a fly in the ointment in all of this … costs.

As I said, it’s too early to get a firm handle on costs. But I’ll tell you this much right now. It won’t be cheap.

And it’s getting more expensive all the time.

Petrobras (from Brazil) is hogging the word’s deepwater rigs and singlehandedly causing a shortage of these sought-after rigs. There are only 21 of them in the world. Petrobras is negotiating to lease 17 on top of what it already has to help explore its Tupi basin and nearby fields.

As a result, these rigs are going way up in price. BP leased one for $480,000 per day at the beginning of the year. Now, they’re going for as much as $600,000.

Shallow offshore drilling is also becoming much more expensive. For example, the company in the excerpt above said its jackup rates (jackup rigs operate in waters of 400 feet or less) in Asia went up 5 percent in the first quarter this year (compared to the fourth quarter of 2007).

Both gold and oil are hedges against inflation… but which one is the best?

The divergence between the prices of gold and oil has been the subject of much speculation over the last few months. The FT waded into the argument this morning with two opposing views on the front page of Companies & Markets.

The first came from Ian Harnett at Absolute Strategy Research. He noted that an intriguing feature of the current oil price spike was that it brought the price of WTI to a 40-year high when compared with the price of gold.

“Only briefly – back in the late summer of 2005 – has an ounce of gold purchased fewer barrels of oil. We expect such a situation is unlikely to last for long… so it may be time to be long gold and short black gold,” he said.

Then there was the view from Julian Jessop of Capital Economics. He argues that the ratio between the two commodities was not stable over time and he reckons that gold has its limitations as an inflation hedge.

He thought gold’s recent slide was down to the fact that the dollar is set to undergo a slight recovery and the rise in the oil price was down to expectations of emerging market growth. The fledgling economies need more oil than gold. Based on this argument, he reckons that the gold price will not get moving until there is evidence of significant inflation in the US.

So where do I stand?

Well, I lean more toward the view from Julian Jessop. My argument is that the gold price fall was driven by the realisation that the US Fed was running out of rate-cut ammunition. They can’t cut rates much below 2%.

However, I am also sure that inflationary pressures are building in all economies, driven by food-price inflation and rising raw material costs. I think significant inflation is here already, so Jessop’s trigger that will get the gold price moving again is actually with us now. When markets will wake up to this fact I simply do not know… but I believe they will.

I also reckon that supply and demand dynamics in the oil industry will keep the oil price above $100 for the rest of this year… but I cannot ignore the speculative element of recent gains.

The view that gold will not start moving again until US inflation ratchets up is commonly held in the market – this has made investors seeking a hedge favour oil. Recent US inflation data has been tame, but regular readers know that I do not believe inflation figures released by governments… they are all damned lies.

US consumer prices rose a smaller-than-expected 0.2% in April and everyone breathed a sign of relief. I reckon this was a mistake.

Governments manipulate figures. They change the way unemployment is calculated to flatter the figures and they massage inflation data to meet their own ends. I therefore don’t believe the US inflation data – and anyone who buys food or gas in the US (that’s, almost everyone) could see that these figures are essentially a lie.

Fortunately, shadowstats.com calculates CPI the old-fashioned way. It uses the methodology applied before 1990, when Bill Clinton started playing with the way these figures are worked out.

Pre-1990 methods indicate a US annual CPI rate of just below 12%.

This is much more believable. I think the same is the case in the UK too… just think about how much your electricity bills, petrol costs and food bills have gone up. That’s not even considering soaring council tax bills and Gordon’s underhand stealth taxes.

The reality is that we are in a very serious inflationary environment. We are also seeing accelerating oil demand from emerging economies.

Investors seeking a hedge against inflation can choose between gold or oil. Over the last few months, oil has won out and investors seeking a hedge have put money in oil futures as a momentum trade. Harnett’s argument was that this was about to be reversed and you should sell oil and buy gold.

I disagree…

You should buy oil AND buy gold…

Demand will support the oil price and inflation will eventually get the gold price moving.

There may be time in the coming months and years when the market favours gold as a hedge and when it favours oil. By owning both, you can let debates such as the one seen in the FT today play out, safe in the knowledge you are hedged against the ebb and flow of these views.

Long-term, however, the price of oil is heading higher and the price of gold is as well, so the which-is-a-better-hedge debate is irrelevant to those with a long-term view.

These commodity-price rises will be caused by rampaging inflation, by the demise of the dollar as oil is priced in other currencies and by soaring demand from Asia.

You need to own both gold and oil. Then you can ignore these debates about which is the better hedge.

Remember: We are investors not traders… the long term outlook for both commodity classes is extremely bullish.

The only problem you should be facing… is deciding which oil and gold stocks to buy. With the prices for both certain to rise… and give a great hedge… what does it matter which stocks you buy?

Such thinking is nonsense… there are a multitude of wrong moves to be made in these markets. Discover what all the right moves are now…

Regards

Garry White
Editor
Smart Commodities UK

Source: Gold or Oil, No One Agrees on the Best Hedge

They’ve watched as oil prices continued to set new records, understanding that global turmoil and rising demand from China means that “black gold” won’t be getting cheaper anytime soon.

They’ve stared as global food prices continued to soar, touching off riots overseas and bringing U.S. lawmakers to the brink of fisticuffs because of debates over whether corn now earmarked for ethanol should be used to fill empty gas tanks, or empty stomachs.

And they’ve waited expectantly as the good old U.S. greenback – whose historic swoon against key global currencies has been exacerbated by an epic rate-cutting campaign by the U.S. Federal Reserve – suddenly reversed course and mounted a two-week rally (despite last Wednesday’s rate reduction, the central bank’s seventh since September).

When they occur separately, each of these developments – increasing oil prices, soaring food and commodity prices, and a plummeting greenback – are highly inflationary. But when they happen in tandem, the ascent in prices can be almost vertical. In such an environment, investors scramble to find a so-called “safe haven” for their money. And the best safe haven has generally been gold.

Until now, that is.

Gold dropped below $850 an ounce last week – representing a decline of more than $182 an ounce, or nearly 17%, from the yellow metal’s March 17 record of $1,032.

The main culprit: The resurgent U.S. dollar. Since mid-to-late April, the U.S. greenback has gained ground against several major currencies, such as the European euro, the Japanese yen, the British pound, the Swiss franc and the Canadian dollar. And that rally could continue, especially now that the U.S. Federal Reserve has all-but-promised to end the ambitious rate-cutting campaign that it’s been operating since mid-September.

But Money Morning contributing editor Martin Hutchinson thinks other forces are at play, too.

“Credit conditions have eased since March because of the Bear Stearns (BSC) bailout and so investors’ fear level is less. [The] stock market is up too, which suggests the same,” Hutchinson said.

Moreover, gold’s meteoric rise from $654 to $1,032 an ounce in a year (a 57.8% gain) attracted a lot of bulls and speculators whose demand helped push prices further skyward. When gold started to slip, gold bulls sold off their holdings, nudging the yellow metal into its current tailspin.

Such a slippery slope is unusual for gold, but those very conditions could be strong drivers of gold’s next rally.

“The gold market is quite illiquid, which is why I think a real speculator panic about inflation could send it zooming,” Hutchinson said.

And inflation could be the catalyst for such a speculative panic.

Inflation, Interest Rates and Gold

Gold may be down from its high, but it’s not out.

“It still looks heavy at this point. The downtrend that we are seeing at the moment is probably going to start slowing down soon,” Taso Anastasiou, technical strategist at UBS Investment Bank (UBS), told Reuters.

In fact, gold’s current price could be seen as a “discounted” entry considering three catalysts – worldwide monetary policy, global supply-and-demand, and past performance – have already ignited a powerful rally that’s virtually certain to carry gold past $1,500 this year.

And, as Money Morning has chronicled, some experts have even predicted that gold prices would reach the $2,000-an-ounce level within the next year or so.

Global inflation will be a key -if not the key – factor. Interest rates have been significantly reduced around the world, with many countries following the Fed’s lead.

To fight inflation, central banks will have to raise rates. But central bankers – including the U.S. Fed – won’t make those moves without a great deal of thought beforehand, Hutchinson said.

“And during that period, expect speculative demand for gold to intensify and its price to increase steeply. The longer the period before the Fed is forced to increase interest rates, the higher gold will go,” he said.

How to Play and Profit from $1,500 Gold

Until the Fed reverses its monetary policy strategy and increases interest rates, gold is one of the best investment bets available in an uncertain economic climate.

Money Morning suggests six gold plays to consider while gold is priced down:

• The simplest way to play gold is through the StreetTracks Gold ETF (GLD), which tracks the gold price directly. And with a $17 billion-plus market cap, it has ample liquidity.

• Barrick Gold Corp. (ABX) is a Toronto-based company with mostly North American production, as well as properties in South America and Africa, and some copper and zinc add-ons. It has a $38 billion market capitalization, so there’s plenty of liquidity. It has a trailing Price/Earnings ratio of 29.65, but a forward P/E of 13.69. By gold-mining standards, this company has a substantial presence, is reasonably valued, and has little political risk. The company also recently sent some very bullish signals to the market and recently reasserted its confidence in meeting its 2008 output target of up to 8.1 million ounces of gold. [For more details, read a related story about Barrick Gold]. Barrick is scheduled to report its first-quarter earnings results tomorrow (Tuesday).

• Yamana Gold Inc. (AUY) is another U.S.-listed Canada-based company, but this one does its mining in Brazil, Argentina, Chile, Honduras and Nicaragua. It has a market cap of $9.7 billion and a trailing P/E of 40, but its forward P/E is only 14. Despite its geographic reach, it faces only a medium geopolitical risk. Expect the company to double production to 2.2 million ounces per year by 2012, primarily in Brazil and Argentina. 

• Gold Fields Ltd. (GFI) is a South African company that mines in South Africa, Ghana, Australia and Venezuela (where it just sold control to a local company, reducing its exposure to an arguably risky market). The company’s market cap is $9 billion, its trailing P/E is 20.98, and its forward P/E is 10.41. It faces a somewhat upper-medium political risk, depending on what you think of South Africa, where the electricity supply to the gold mines is currently unreliable and there’s a good chance of Jacob Zuma winning the presidency in April 2009. Given his record as an anti-Western leftist, and the corruption charges he faces, his potential return can only be viewed as a major negative.

• Kinross Gold Corp. (KGC), another U.S.-listed Canadian company, engages in gold and silver mining, with primary operations in Canada, the United States, Brazil, Chile and Russia. In February, Kinross issued shares to buy a large Brazilian/Russian company. Political risk is low-medium. It has a market cap of $14 billion, a trailing P/E of 32.32, and a forward P/E of 16.03. It looks somewhat expensive. 

• Royal Gold Inc. (RGLD) is a U.S.-based company with mines in Nevada, Mexico and Argentina. It faces low political risk. But with a market cap of $905 million, a trailing P/E of 40.56, and a forward P/E of 22.38, the stock looks expensive.