# W8_HWB_Forecast of Construction Cost with Gold Price

1. Problem Definition

In this 8th blog I will try to calculate the construction price forecast for Drilling Site Preparation (DSP) for year 2022 with predictions based on the gold price increases. As we know the value of gold has relative purchasing power remains. The cost price that would be predicted is for budgeting POFD (Plan of Future Development) in onshore oil and gas field as part of the 30 years contract.

2. Development of Feasible Alternatives

The owner estimate of DSP jobs in 2005 was USD 286,175 where the site area of 90m x 90m with pareto job is earth works. The price of gold in 2022 is determined based on extrapolation of historical data from 1970. Then determines the “CPI (Consumer Price Index) Basket” to obtain the value of construction cost which comparable to the value of troy-ounce gold.

3. Development Outcomes for Alternative

Below are the historical data of the average price of gold per year from 1970 to 2012:[1]

 Year Gold USD per oz Year Gold USD per oz Year Gold USD per oz 1970 36.02 1986 368.00 2002 309.73 1971 40.62 1987 447.00 2003 363.38 1972 58.42 1988 437.00 2004 409.72 1973 97.39 1989 381.00 2005 444.74 1974 154.00 1990 383.51 2006 603.46 1975 160.86 1991 362.11 2007 695.39 1976 124.74 1992 343.82 2008 871.96 1977 147.84 1993 359.77 2009 972.35 1978 193.40 1994 384.00 2010 1224.53 1979 306.00 1995 383.79 2011 1571.52 1980 615.00 1996 387.81 2012 1668.98 1981 361.00 1997 331.02 1982 376.00 1998 294.24 1983 424.00 1999 278.98 1984 361.00 2000 279.11 1985 317.00 2001 271.04

Here is a picture that shows the value of gold price of constant value “CPI Basket” in oz per USD 1000. [2]

4. Selection of Criteria

From picture above, data capture oz per \$ 1,000 from year 1970 as follows:

 oz gold per 1000 USD Series 1 Series 2 Series 3 Series 4 Series 5 Series 6 5.09 1.42 2.08 0.62 2.98 0.69

5. Analysis of the Alternatives

The value of the average price of gold per year are plot into the charts and it extrapolate to year 2022 with trendline polinomial order 3 as below:

The formula given from extrapolation data is : y = 0.126071696894463x3 – 752.157284401168000x2 + 1,495,799.964160270000000x – 991,544,040.599164000000000

Where ‘y’ is gold price per oz and ‘x’ is year, so the predicted gold price per oz in year 2022 is USD 4421.93.

From the data gold as “CPI Basket”, will be find the ‘most likely’ value with P90 as below:

 min 0.620 max 5.090 avrg 2.147 mean 2.383 diff 4.470 sigma 0.745 var 0.555 z P90 1.300 UCL 5.288 5.288 5.288 5.288 5.288 5.288 sigma+2 4.320 4.320 4.320 4.320 4.320 4.320 sigma+1 3.351 3.351 3.351 3.351 3.351 3.351 mean 2.383 2.383 2.383 2.383 2.383 2.383 sigma-1 1.414 1.414 1.414 1.414 1.414 1.414 sigma-2 0.446 0.446 0.446 0.446 0.446 0.446 LCL -0.523 -0.523 -0.523 -0.523 -0.523 -0.523

So thus obtained control chart graph as below :

From control chart above, we can say that the data are not out of control since all the data are not one of the “out of control” criteria [3], so the gold price of constant value “CPI Basket” is 2.383 oz per USD 1000.

6. Selection of Preferred Alternative

We can estimate the cost of DSP in 2022:

USD 286.175 x 2.383 oz/USD1000 x USD 4421.93 = USD 3,015,271.71

7. Performance Monitoring & Post Evaluation of Results

The estimation results of this forecast budget can be used as reference other than calculation by currency inflation predictions. The price of course can be updated with respect to current gold prices and displays various other types of trendline that comes closest historical chart pattern data.

References:

[2] Using History to Determine Gold’s Intrinsic Value [SPDR Gold Trust (ETF), iShares Gold Trust(ETF), ProShares Ultra Gold (ETF)] – Seeking Alpha. (n.d.). Retrieved from http://seekingalpha.com/article/262560-using-history-to-determine-golds-intrinsic-value

[3] Brassard, M., Ritter, D., & GOAL/QPC (2010). The memory jogger 2: Tools for continuous improvement and effective planning (p. 62). Salem, N.H: Goal/QPC.

Filed under Hari W, Week 08

### 3 responses to “W8_HWB_Forecast of Construction Cost with Gold Price”

1. Sorry Pak Hari, you made one FATAL error in your calculations……

What you needed to do was DIVIDE the ACTUAL COST OF THE PROJECT in 2005/Price of Gold in 2005. \$286,175/444.74 = 643.47 ounces of gold EQUIVALENCE. Then you multiply 643.47 ounces of gold by the projected 2022 price of gold. 643.47 X \$4,421.93 = \$2,845,361.

Better go back and check your references again. Look at Hari Kumar’s paper- http://pmworldjournal.net/?article=exploring-gold-as-alternative-currency-for-future-cost-estimation-in-telecommunication-projects or Pak Trian’s paper….. http://pmworldjournal.net/article/exploring-gold-equivalency-for-forecasting-steel-prices-on-pipeline-projects/ to see how they did their calculations.

The SPC chart you created was done correctly but it is only to show you that the purchasing power parity of gold is STABLE and that the process is NOT out of control.

IF you want to get a best case, worst case and most likely projection then you need to do what Pak Trian did in Figure 13 on page 13 of his paper. Or see what Pak Hari did in figure 15 on page 14 of his paper.

THAT is where you get your best case, worst case and most likely projections from……

Great case study and it should only take you 15-20 minutes to find your mistake, fix it and repost as W8.1….

BR,
Dr. PDG, Jakarta

• Dr Paul, how to link it with gold as CPI (oz per USD 1000) ? plis advis.

HWB

• Hari, why not ask your team members for some help? I am pretty sure that Pak Arif has mastered this topic… Why not ask him for help for if you look back a few weeks he had the same problems you are having understanding how to use gold as the baseline factor. What I think you are trying to do is use the DOLLAR as the basis and not the purchasing power of gold as the baseline… Talk to Pak Arif……