May 26, 2008 – What a week this has been! As the oil price soared and gasoline prices at the pump touched $4 per gallon, the search for scapegoats picked up momentum. Congress led the parade of misguided crazies.
The House of Representatives says sky-high oil prices are OPEC’s fault. It overwhelmingly passed a bill that would create a new oil anti-trust task force within the Department of Justice. According to its sponsor, this bill would give the DOJ authority to sue foreign oil cartels for violating US antitrust laws. No, I am not kidding!
This display of stupidity is so egregious that one can only assume that there is no hope for this nation! Do the 384 Congressmen who voted for this bill really believe that threatening to sue OPEC, or worse yet, actually suing them, will somehow miraculously increase their production to enable them to meet growing demand?
Not to be outdone, the Senate also participated in the folly. They blamed higher oil prices on the speculators, always the favorite bugbear of demagogues.
A Senate committee is considering legislation that would place restrictions on the ability to acquire commodities, in effect making it difficult if not impossible for investors (and not just speculators because it is essentially impossible to define and identify the members of that ‘shadowy’ group) to protect themselves from the ravages of inflation. This type of legislation would hasten the collapse of the dollar as market participants would simply move their money outside the US and no longer participate in US markets.
I mean, what are these guys and gals in Congress smoking? Do they really think that their constituents are so weak minded, grossly ill-informed or just generally uneducated about basic economics and how the world really works that they would welcome this kind of pandering by their Congressmen? Who knows, but this kind of whacko thinking is a typical response as a nation’s currency collapses.
Politicians of all stripes think that legislation and words are more powerful than economic forces and action. These would-be King Canutes aim to hold back the tide of currency depreciation by their command, rather than look for the real culprit – which is all the spendthrifts in Washington D.C. who have put the ship of state on the wrong course by abandoning gold and instead making fiat currency the coin – err, ‘paper’ – of the realm.
This insight about the importance of gold and shortcomings of fiat currency is not suprising, nor is it new. Here’s what Rep. Howard Buffett, father of Wall Street legend Warren Buffett, had to say on May 4, 1948. “Our finances will never be brought into order until Congress is compelled to do so. Making our money redeemable in gold will create this compulsion.”
Of course there is no compulsion, so on it goes. The folly of government hits new heights, or maybe I should say new lows.
Politcians will never blame themselves, when it is easier to pander to xenophobic fears and prejudices. Blame the Arabs because they are not pumping enough oil. No, it’s the Chinese because their economy is growing too fast. Or wait, it’s the Venezuelans because their government sells gas at the artificially low and subsidized price of 20¢ a gallon. No, it’s the Indians because – well, on and on goes the blame and finger pointing. I mean, its getting really crazy out there!
The price of crude oil is indeed climbing, but to get a true picture, one has to look at the price of crude oil in terms of gold. The accompanying chart does this. It presents the price of gold in terms of goldgrams.
Until 2000, the goldgram price of crude oil was relatively contained, except for the relatively brief spike in 1990 that occurred as a result of the uncertainty leading up to the Gulf War. Since 2000, the price of crude oil has been in an uptrend, and is now again approaching the record high reached briefly back in 1995. There are two ways to explain this chart.
First is peak oil. As global production becomes constrained and cannot keep up with growing demand, the price of oil will inevitably rise. These fundamental economics explain how the market process works. A rising price will lessen demand and also hopefully stimulate production, with supply and demand coming into balance at a new, higher price.
The other reason the price of crude oil is rising is the price capping actions of the gold cartel. If gold were allowed to reach its true free-market price, it would be a lot higher in dollar terms, and thus a goldgram would buy a lot more oil than it presently does.
It is impossible to say which of these two forces is more important. But clearly, both of them are impacting the goldgram price of crude oil.
How will it all end? Readers of these letters will not be surprised to hear my forecast. We are witnessing the death knell of the dollar. Not only is its nearly seven decade reign as the world’s reserve currency coming to an end, but the dollar itself is near death. As I often say, the dollar is on the road to the fiat currency graveyard, but more to the point, the crazy stuff we are now seeing indicates that it will very soon be joining the hundreds of other fiat currencies already buried there.
The present flight into crude oil and other commodities is not a bubble. It is a flight out of the dollar into assets that have utility.
I think a dollar crisis is likely this summer. Get ready for it. The best way to be ready is to avoid the dollar and hold gold and silver instead.