The Gol Economic Report

Shawn Golshani 4 Executive Vice President

When deciding which candidate deserves your vote it is important that he/she has a Strategy to Deliver…

1) Better Food
This costs MONEY. So where do we get it?
You pay Babson for your meal plan. But what happens with you don’t swipe in? It stays with Babson. The is an extra pool of money that is left over. With this we can reinvest in FOOD

2) Better Events
With homework waiting for you every week there should be a party waiting for you every week. We have made great progress with on campus parties and we can continue it by making sure we allocate enough dollars to our social life.

3) Better Rankings
The first two increase our rankings by making Babson Students Happy. I have been working since JAN 2008 to make sure people vote well in the Business Week Survery. Once our rankings get higher and higher it will catch the attention of JOB RECRUITERS even more so.

I have been working closely with JOHN from the SGA E-board to make sure these idea are in line with his. John and I make an effective team

Experience:
1) Elected CEO
of FME business and lead it to first place finishing with a net profit of $9,000 

2) Student Body Vice President of Previous school in Los Angeles.

3) Elected Social Chairman
on multiple terms at AEPi

3) Student Government Senator


DAY TO VOTE:
Tues Sept 9th
An e-mail with the link will be sent out

The Recession of 2008 (Released 2007)

The Perfect Storm for Oil & Gold

Take a glance at the economy today and you’ll find that all our historically accurate indicators and measures all are saying the same thing: the U.S. economy is transitioning from a growth period into a downward spiral known as a recession. Don’t take it from me, ask any economist, politician, or member of the federal reserve and you’ll see that no one is disagreeing with the fact that we are heading for a recession. The president of the Federal Reserve said himself that we are heading into an “economic slump”. Further evidence is in the fact that the Fed has lowered their projections for growth for 2008 from 2.5-2.7% to a new projection of 1.8-2.5% .

Oil Prices so bad that we have to drill at home

“Mounting concerns about global energy supply are fueling a drive by the oil industry and some U.S. lawmakers to end longstanding bans on domestic drilling put in place to protect environmentally sensitive areas”. - Wall Street Journal

The American public is often mislead with the false hope of short term oil solutions like the one above: untapped oil reserves. But just like alternative energy, the implementation of such an action plan is years away. For congress to pass legislation to drill in national parks that have been locked away from big industry for 100 years will take more than just a few strokes of a pen.

More importantly, no one is saying there is no more oil in the world. The argument simply is that easy to obtain oil is over and that oil in the future will simply cost a lot more to extract. There is oil in sands and in shale but both of these pose more difficult challanges for oil companies which means they cost more dollars. These extra bucks will be passed on to the consumer which means we the people have to pay more at the pump.

“We simply cannot drill our way to lower prices at the pump,” Rep. Nick Rahall (D., W.Va.), chairman of the House Natural Resources Committee, said in a written statement

But what does this all have to do with GOLD?

My research on oil, inflation, the dollar, interest rates, and social security all show that these seemingly unrelated economic measures are all important variables in the price of gold. In other words, in order to see where gold is going we must know where the economy is going. One undeniable fact is that gold shoots up when oil prices jump. For the last 30 years (since gold was put on the free market in the 1970’s) the price of gold has had a remarkably consistent relationship with oil.

The first and most significant indicator for Gold: Oil.

Just take a look at the chart for oil prices and put it on top of the chart for gold prices and you will find a remarkably close correlation. We see that the price of gold follows the price of oil. But why? What is the relationship between Gold and Oil?

The relationship between GOLD and OIL.

Just as you learned in your geometry class that if A=B and B=C THEN A=C that is the relationship between gold and oil. To understand the relationship you must know that gold is an inflationary hedge. This means that gold rises with inflation. This is a historically accurate fact that no economist will disagree with. One thing you will hear is that gold has a time lag behind inflation but nevertheless gold rises as inflation rises. Next, the reader must know that increases in oil prices always spur inflation. The reason behind this direct relationship is that energy is the lifeblood of the economy. Because the globe is so unimaginably dependent on oil for at least the next ten years oil is the lifeblood or energy of the economy. Thus, an increase in oil prices takes a cut out of everyone’s profits which leads to price hikes to compensate. Now, if increases in oil create an increase in inflation and gold keeps up with inflation this means that an increase in oil prices also increases gold prices.

“Surging energy prices are wreaking havoc on producers and speculators who made bets on lower oil prices, forcing some to buy oil to exit their positions. That, in turn, is helping push up oil prices” - Wall Street Journal

So then our discussion turns to oil.

Today’s global oil production is at 85 million barrels a day and 87 million for 2008. We are very close to maximum capacity. Chiefs of the oil cartel OPEC have admitted themselves that they cannot meet the 100 million barrel a day forecast for demand by the end of the decade. Let’s not forget that the global economy is booming. China, India, Brazil, and the EU are all flourishing which means their irreversible thirst for oil is rising. But it was not always was like this. The last time we had a spike in oil prices America was the only major consumer. Here is the part in my argument that some people stop me to say that alternative energy will come to the rescue and I simply reply that alternative energy as a short-term solution is a myth. In 2006 all the bioenergy produced in america was equivalent to less than 1% of the oil demanded by americans according to the Energy Watch Group.

“The oil investments required may be much, much higher than what people assume,” said Fatih Birol, the Internation Energy Agency’s chief economist and the leader of the study, in an interview with The Wall Street Journal. “This is a dangerous situation.”

“The International Energy Agency’s pessimism over future supplies has been building for some time. Last summer, the agency warned that OPEC’s spare capacity could shrink “to minimal levels by 2012.” In November, it said its analysis of projects known to be in the works suggested that the world could face a shortfall by 2015 of as much as 12.5 million barrels a day, unless there was a sharp drop in expected demand” - Wall Street Journal

“High-profile investor T. Boone Pickens (The long-time oilman and current chairman of BP Capital Management) told cable network CNBC he expects oil prices will continue to rise, possibly to as high as $150 this year. He stressed that high oil prices are tied to depletion of supplies around the world and aren’t being driven by speculators, as some industry observers maintain. ‘There is no bubble ’ he said.” -CNBC News

Let’s jump into the hypothetical and say that if all the most powerful world leaders today decide that they all want to implement alternative energy instead of oil, that implementation would take at least 10 years becasue we are so dependent on oil in addition to not being prepared for switching to alternative energy. Remember that oil is the common denominator in the costs behind our economy. Thus to switch to alernative energy would mean an violent reconstruction of our global economic system. Leaders in the oil industry realistically think it will take 30 years. By having these facts about oil on the table we then see that its clear: the demand for oil is surpassing supply. Anyone in economics 101 can tell you that high demand and low supply means feverishly high oil prices. Now if your still not convinced that oil prices will keep going up, you should know that today’s oil is not even at an all time high (when adjusted for inflation). The inflation adjusted record for oil is $102 a barrel and we are still not there. If you think that this is new news your wrong because you can read the reports of our past presidents who predicted oil would be $100 a barrel for start of 2008 or look at the book “the Oil Factor” by Stephen Leeb PH.D which states that oil will be at a minimum of $100 a barrel by2008. In conclusion, we see that the strongest indicator for GOLD is oil and oil will be posting high prices in the long run.

“By some estimates, there will be an average of two-percent annual growth in global oil demand over the years ahead, along with, conservatively, a three-percent natural decline in production from existing reserves. That means by 2010 we will need n additional 50 million barrels per day.”

-Vice President United States: Cheney

“Only a serious demand destruction or a jump in supplies from Nigeria or other oil producing nations or a jump in gasoline output by U.S. refiners could stop prices from continuing to rise. There is little sign that demand will fall anytime soon in fast-growing China, India and the Middle East” -New York Times

“With demand for oil growing in the developing world, and little end in sight to supply problems in producing countries such as Nigeria, few analysts are willing to call an end to crude’s rally” – New York Times

“The oil multinational(Shell) is predicting that conventional supplies will not keep pace with soaring population growth and the rapid pace of economic development.Jeroen van der Veer, Shell’s chief executive, said in an e-mail to the company’s staff this week that output of conventional oil and gas was close to peaking. He wrote: ‘Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand’.The boss of the world’s second-largest oil company forecast that, regardless of government policy initiatives and investment in renewables, the world would need more nuclear power and unconventional fossil fuels, such as oil sands.”

From Royal Dutch Shell -Wall Street Journal

But wait, what about new oil fields around the world?

The internation oil company to look out for is Petrobras in Brazil. This massive oil operation is challenging world oil supply by successfully hitting massive oil fields off the coast of Brazil. Again, like the oil in the U.S. this Brazilain oil is exceedingly difficult to extract for it is in “ultra deep” ocean water under a thick layer of salt. It is not impossible to get to this oil but it will be much more expensive than the oil the saudis have comming out of their ears.

“Exploring and extracting oil from ultradeep waters is an expensive and risky proposition. The salt that sits atop the potential fields adds technical challenges because it shifts and is prone to sudden pressure changes. And despite the advances in geological imaging technology, it is impossible to know the quantity and quality of oil hidden in a deposit until it starts flowing, a process that takes years” - Wall Street Journal

“The publicly traded slice of Petrobras has risen so much this year that the company’s market value has surpassed that of household names like General Electric Co. and Microsoft Corp” -Wall Street Journal

The second indicator for GOLD: crisis and poor economic health.

Gold is more than a commodity people invest in for it has a psychological value to it too. Gold is seen as a safe place to put your money because you can touch it, its shiny, and has glamorous connotations to it unlike a stock which the investor simply gets a piece of paper. Gold has always done well in certain situations like when other investments underperform, a crisis situation like a war is present, or when the general health of the economy is poor. If the rising prices in oil are not enough to convince you that gold is going up, up, and away, let’s diagnose the health of the economy.

“Big oil consumers such as airlines have become so alarmed by rising costs Wall Street trading officials said some are rushing to buy oil to lock in future costs. ” - Wall Street Journal

Indicators that the Economy is going through a downward trend.

The weak dollar is only getting weaker. Just listen to the reports of the high level executives in our government. They will all tell you the same thing: that the long term strength of the dollar is a priority not the short term strength. The Fed has many different, conflicting objectives to meet which means in order for them to get the economy back on track they are forced to lower interest rates to ease the “economic slump” we are heading for. Any economist will tell you that lowering the interest rates weakens the dollar and spurs inflation. Interest rates have dropped a whopping 75 basis points in three months which is huge relatively speaking. So we see that the dollar is weak which is another factor that hurts the economy and that helps the price of gold because gold is quoted in dollars. The economy is experiencing inflation but not only from oil but low interest rates too.

“For oil, non-OPEC production, particularly in the North Sea and in Mexico, has proved disappointing, and OPEC production has remained restrained. But the prices of commodities have risen substantially in terms of all currencies, not just the dollar. In sum, lower interest rates and the reduced foreign exchange value of the dollar may have played a role in the rise in the prices of oil and other commodities, but it probably has been a small one.” - Vice Chairman of the Federal Reserve Donald L. Kohn

The Kicker: Negative Interest Rates.

Now when gold really starts to zoom ahead is when the economy is experiencing what is called negative interest rates. This is a fancy term that just means that interest rates are lower than the rate of inflation. The reason why this formula is devilishly powerful for gold is that because gold keeps up with inflation all you have to do is buy gold and it will outperform the other interest rates in other investments. Essentially, an investor can borrow money to buy gold and the gold will cover the financing costs in addition to making the investor a profit. As interest rates get lower, we get closer to negative interest rates which makes the value of gold go up. And because the economy is going into a recession (as supported by Federal Reserve Chairman Ben Bernake) we can expect low interest rates as a tool for damage control just like we saw with September 11th when interest rates dropped to 1% to help the economy get back on track.

Real estate, Social Security, and the Stock Market

Let me give you a tried and true economic indicator that is very powerful for the Stock Market. Remember we stated above that oil is the lifeblood of the economy and high oil prices means a cut in corporate profits which means increases in price also known as Inflation. A formula has been created that says if oil has over an 80% year to date increase in price that this hike is too much too fast for the economy and the stock market will go down for the next year. But if the year to date price in oil is less than 20% this figure is sustainable by businesses and the stock market will not go down. Remarkably, this formula has been applied time after time in the last 30 years and has held true. Because there has been an upward spike in oil we will see the stock market end lower for 2008 then when it opened in January. In fact it has already begun its downward trend with companies like FedEx lowering their projections because fuel prices are simply unsustainable.

But the stock market is not the only soar spot in our economy. In January 2008 there will be 78 million Americans filing for social security. Now wait a second how many Americans are there in total? That figure is 300 million. That means that over one quarter of American is filling for social security. Where is all this money going to come from?

When the subject of real estate comes up it is the easiest one to understand. The 6 year boom in real estate due to cheap interest rates that were due to a recession in 2001 with September 11 have created an overbuild of supply. There is so much supply on the hands of America that if consumers buy properties at the rate they are buying today, there is enough homes to last 2 years. Now don’t forget about the broken consumer confidence in the real estate market due to sub-prime loans which cost Bear Sterns trillions of dollars and caused for the CEO of Merrill Lynch to be booted. If you search the news for a piece of good information on real estate you won’t find it.

“Oppenheimer analyst Meredith Whitney said she expects the credit crisis to continue into 2009 and ‘perhaps beyond’ and that large banks like Citigroup and J.P. Morgan may need to set aside about $170 billion by the end of next year to cover credit- and mortgage-related losses”. - Oppenheimer Funds

War as an economic indicator.

Let’s not forget our country is spending hundreds of billions of dollars on the war in Iraq. All this spending does not help our economic situation and it hurts an already damaged consumer confidence. Iran is not making the situation better with its nuclear program and its tensions with the U.S. Both of these factors are not going away for a while and both factors help raise the price of gold because they hurt both the economy and consumer confidence.

Let’s Talk about GOLD’s history

Now you might look at the price of gold right now ($800 an oz) and think that its expensive and that it can’t possibly get more expensive. In fact gold recently hit its 28 year high. But don’t forget that the last time gold was valued at $800 an oz was in the 1980’s. This means that $800 was worth a lot less than it is today. So when we adjust for inflation Gold is historically not expensive compared to its adjusted high of $2,000/oz.

It is important to know a historical fact about gold and that it has a lot of inertia. By this we mean that when it is going up it gallops ahead for years and when it goes down is sinks for years. This means that if gold begins to turn downward we will all know about it. You will never wake up in the morning to see that the value of gold has cut in half. In conclusion we see that today’s economic environment is in fact the perfect storm for Gold.

How to Buy Gold

There are a number of ways to buy gold. I recommend to buy something that is new to the market that facilitates commodities trading. See the problem with buying gold in the past has been that you have to worry about storing it. But now you can buy stocks that track the price of gold. These stocks are known as ETFs which stand for exchange traded funds. Search for the ticker symbol GLD or IAU and you will find a stock that perfectly tracks the price of gold. Right now GLD is selling for about $80 a share and gold is about $800. Also, we see that when gold was $600 this ETF was trading for $60.

Article from 2005 on Supply and Demand problem of oil
http://money.cnn.com/2005/03/21/commentary/column_hays/hays/

Videos on oil:

http://youtube.com/watch?v=4nyMZ2jIcmQ

http://news.morningstar.com/articlenet/article.aspx?id=214301&pgid=rss

The day after this was posted CNN Money came out with the article below: Here Comes the Recession

http://money.cnn.com/2007/11/23/magazines/fortune/barr_recession.

fortune/index.htm?section=money_topstories

Shawn Golshani 2007 ©