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Oil Crosses $50 Raising Inflation Fears

Another sure sign that inflation is a clear and present danger is the recent rise in oil prices. Wednesday, crude oil set its 2009 high at $54.83 in New York intraday trading.

And as Adam Lass points out in Taipan Daily, “for most of this year, $50/barrel has been one of those psychological ‘lines in the sand,’ much like Dow 8,000 for a while there.”

There can only be two reasons for this, according to Adam:

First of all, there is the obvious: if the global economy recovers even in the slightest, the ensuing increases in manufacturing, shipping and travel will require energy, and despite the best of green intentions, for now energy still means oil.

Second, despite all the rumblings about finding a new world currency, oil is still priced globally in dollars. And while it may be taking Washington an agonizingly long time to actually disburse all the dollars it has promised, it is finally getting around to it.

Eventually, an increase in GDP might soak up enough of those dollars to make a difference. Just as eventually my wife’s dog will grow thumbs and learn to open his own food. Could happen: he’s a pretty smart little guy and all. Still, I am not holding my breath – on either front.

Gold is also likely to benefit from inflation. What many investors – even gold bugs – don’t realize is that small gold ‘explorers’ always produce the biggest gains in gold bull markets.

But what’s really interesting is that they typically explode in price after the price of gold has already jumped. In the late 1970s, for example, the price of gold skyrocketed from around $200 in 1979 to over $800 in January 1980. But it wasn’t until after the price of gold peaked that the best exploration companies saw their biggest gains.

What kind of profits are we talking about? Carolin Mines up 1,739%; Lincoln Resources up 2,464%; Copper Lake Expl. up 13,025%; David Minerals up 1,726%; Eagle River Mines up 3,479%; Silverado Mines up 3,987%; Wharf Resources up 2,779 %

A simple $500 invested in just 11 of these companies would have given you $172,585. $1,000 invested in each would have given you about $350,000.

Mining guru and friend Doug Casey has written a special report about today’s gold exploration companies, Toronto’s Secret Gold Investment. You can get the details here.