As I have written before, predicting the future is, at best, an educated guess and, at worst, a “fool’s errand.”  So, when folks write in and ask me to predict the future on this or that market or the economy, I am reluctant to do so; however, although reluctant, I have and will continue to present my best educated guess, as this is certainly part of what this column is all about – educating traders and investors.  Part of learning the ropes of trading and investing successfully is learning how to make educated guesses about the future, as opposed to grabbing a sensational news nugget, a pundit’s outlandish prediction, or your own myopic view of what is going on in the markets, or in the world, for that matter.  Making educated guesses requires that one gather information from a wide variety of sources, analyze that data in an accurate and large context, and, as well, comparing what you think you know to what others of knowledge are saying. 

The reality is, though, no matter how informed you are, no matter how well you analyzed, and no matter what others smarter than you are saying, unknown forces can change the direction of markets and economies quickly and powerfully.  Witness events in the Middle East for example, which brings me to another point – expect to be wrong a certain percentage of the time.

In January, a number of you asked me for predictions about 2011.  Generally, I said it would be a good year for the economy and the market.  Specifically, I said oil would be at $100 per barrel by June and that the price of gold would hit $1200 before it would hit $1500.  To arrive at these predictions, I analyzed the economic fundamentals surrounding both commodities, but here is the problem – fundamentals go out the window when events such as what is happening in the Middle East occur.  Speculation takes precedence over reason and the markets respond.

LONDON (Reuters) – Oil prices turned lower on Monday as reassurances from Saudi Arabia that extra supply needs had been met soothed market fears over the spread of protests to oil-producer Oman.  Violent uprisings in OPEC member Libya dramatically reduced exports from North Africa, but Saudi Aramco CEO Khalid al-Falih told reporters on Monday the shortfall had been made up. 

I expect that when the Middle East settles down, the price of oil will revert to the fundamentals of supply and demand.  Currently, those fundamentals point to a glut of oil, which should dissipate as the year progresses into spring and summer when demand and the economic recovery will increase. 

For now, though, in Cushing Oklahoma, the primary U.S. destination for contract delivery of NYMEX crude futures, there are 32 million barrels in surplus.  In fact, the management there expects this to continue, which means they are looking to build more capacity for storing even more oil in the short term.  Thus, one can clearly see that speculation has pushed the price higher, but without identifiable support.  The outcomes in the Middle East will determine if this continues, or if the fundamentals will once again determine the market price.

As to the price of gold, I hold to my “prediction” it will fall, if the events in the Middle East do not take a turn for the worse. However, before that happens, the gold price might rise to $1500, which would make my January prediction wrong.  Do you see what I mean?

Trade in the day – Invest in your life

Trader Ed