1. Problem Definition
In this 8^{th} 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 troyounce 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 = 0.126071696894463x^{3} – 752.157284401168000x^{2} + 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 
sigma1 
1.414 
1.414 
1.414 
1.414 
1.414 
1.414 
sigma2 
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:
[1] London Fix Historical gold – result. (n.d.). Retrieved from http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
[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/262560usinghistorytodeterminegoldsintrinsicvalue
[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.
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=exploringgoldasalternativecurrencyforfuturecostestimationintelecommunicationprojects or Pak Trian’s paper….. http://pmworldjournal.net/article/exploringgoldequivalencyforforecastingsteelpricesonpipelineprojects/ 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 1520 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……