Myths Exposed on what controls Base Metals and Gold Prices

Abstract

Accurate forecasts for medium-term commodity prices and exchange rates are essential for resource companies considering commitment to large capital expenditures. The inaccuracy of traditional forecasting methods is well known because they tend to be extrapolations of the current trend. The inevitable reversal catches too many companies by surprise. I show commodity medium term prices are not strongly linked to economic health, instead are controlled in an inverse sense by valuation changes of the United States dollar. A probabilistic projection for future valuations of the United States dollar is presented, based on the successful analytical techniques of the petroleum exploration industry. I show the United States dollar is significantly undervalued at present. The probabilistic extrapolation of the US dollar valuation indicates likely appreciation will put downward pressure on commodity prices for the next 2-5 years - base metals P50 price likely to average around 40% lower than start of 2010; gold P50 average of USD 500.