How the Fed and U.S. Energy Policy Are Driving Gold Prices Higher

Includes: GAZ, GLD, OIL, SLV, UNG, USO
by: Michael Fitzsimmons

Back in May I wrote an article on Seeking Alpha predicting higher gold prices due to Congress' refusal to pass "audit the Fed" legislation. Gold was around $1220 then. It is no surprise that today we find ourselves anxiously awaiting "QE2" and there is certainly no lack of articles on this subject and why it is bullish for gold and silver.

However, few Americans make the connection between strategic energy policy and gold prices - least of all Greenspan, Bernanke, and the rest of the economists at the Federal Reserve and the White House. Let me make that connection a bit more clear:

  • The U.S. imports roughly 60% of its oil, or about 11,000,000 barrels a day. At $80/barrel, this amounts to $880,000,000 leaving the country every day just for oil. Day after day...year after year.
  • Natural gas is selling for around $1.40/GGE (gasoline gallon equivalent) and gasoline derived predominantly from foreign oil is selling for around $2.68/gallon.
  • The U.S. uses around 378,000,000 gallons of gasoline per day. From the previous bullet, the difference between filling up with natural gas and filling up with gasoline predominately derived from foreign oil is ($2.68-$1.40)*378,000,000= $483,840,000. That's almost half a billion dollars a day that could stay in American consumers' pockets just on the difference between cheaper domestic natural gas prices and expensive foreign oil.
  • Oil today is $82.46/barrel and we import over 60% of it. And who can doubt it is heading higher in the years to come? Natural gas is $3.33/MMBtu and it is OURS. The oft quoted (and now irrelevant) oil to natural gas ratio is now 24.8, way above its historical norm. My March article that described why this indicator has broken out of historical ranges, is irrelevant, and will stay on an upward slope to infinity.

One would think American energy policy experts and economists would be aware of these basic energy fundamentals and adjust U.S. policy to take advantage of the abundant, clean, and cheap *domestic* resource by adopting a strategic long-term comprehensive energy policy and thereby take advantage of our good fortune. But, no. Instead, they chose to stay addicted to foreign oil, embrace the myth of oxymoronic "clean coal", fight oil wars, and bankrupt and pollute the country in doing so.

As a result, Bernanke and the Federal Reserve seem intent on battling a commodity based problem (foreign oil imports) with monetary policy ("QE2" and the like). With no strategic energy policy in place, how else is it possible for the U.S. to "fund" its foreign oil import bill, its deficit spending, and its military programs? Luckily, the U.S. dollar is the world reserve currency of choice. Otherwise, such a strategy would not be possible.

I believe it was Ron Paul who, in his great book End the Fed, points out that a one-ounce $20 gold piece in the early 1900's would buy you a nice suit, shirt, tie, belt and shoes. Today, that same 1 oz. gold piece would do the same (for about $1340). But wait - what would $20 buy you? Maybe the belt. Maybe. This shows how much the U.S. dollar has been devalued under "your" Federal Reserve.

In conclusion, the pundits can watch the Federal Reserve all they want. Bernanke can give speeches rationalizing QE2...QE3...or some other innocuous Fed program designed to cover up the simple fact that the U.S. is broke. Me? All I know is that the lack of an American energy policy will drive gold and silver much higher. Even madman Jim Cramer threw in the towel last night on Mad Money and acknowledged a simple fact: natural gas is a superior fuel, and the U.S. should take advantage of it, but that King Coal is all we'll ever get. Jim never speculates as to why. But the fact is this: the powers that be do not want the U.S. to become energy independent. How else can one explain U.S. policymakers' refusal to adopt the only domestic fuel capable of significantly reducing foreign oil imports? But not only that - natural gas is also cleaner and cheaper. Natural gas transportation is an obvious winner for so many different reasons...yet still, it remains underutilized and not even in the energy discussion. Why?

It appears what the Ivy Leaguers and powers-that-be do want is to weaken the U.S. to the point where a one-world currency is an inevitability. That is the endgame and I have written previous articles on this subject as well. Do the bureaucrats at the Federal Reserve honestly believe they will be in charge of that currency? Regardless, they are apparently willing to gamble away U.S. sovereignty in hope that that is the case.

Bottom line: buy gold and silver bullion. In your IRA's buy the GLD and SLV exchange traded funds. Just remember to cash them in and buy the hard bullion before the IRA's go to zero along with the U.S. dollar. At some point, all U.S. dollar based paper assets could go to zero. Can you say Zimbabwe?

Disclosure: Long gold and silver