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Even Priced in Gold, Oil Is High

"Well, it turns out that even priced in that “currency,” oil is expensive."

The way I see oil priced is on three factors: in relation to gold at 10-1; plus a supply/security premium that factors in Irani embargos or Katrina type damage; plus the speculative premium, standard bubble of new money jumping on an inflated bandwagon.

In today's terms the above yields a base price of $90, plus about $25 for the recent inventory drop and Nigerian threats, as well as the little posturing dances of Bush, A'jad, and Chavez, and the rest as speculation on where oil will go next week or month, basically momentum players trying to squeeze some gravy out of the commodity bisquit:)

The recent drop in oil, 10%, came from speculative positions unwinding because of jawboning by Fed officials. Oil dropped even though inventories dropped, speculative drop overcompensating for what would normally have been about a $5.00 supply spike.

Thursday and Friday's oil spikes resulted from Trichet hinting that the Euro would strengthen from rate hikes and the unemployment jump suggesting that Gentle Ben would give more rate cuts. No concrete actions in sight, just speculation.

Black Gold or Yellow Gold?

" Meanwhile, the value of the US dollar has dropped by 50% in that time period."

Interesting piece, and I do like your realization that politics and the economy, especially in an election year, are linked.

My quibble is with your above. The Dollar has dropped over 70% to gold from it's highs in the late '90's, those glorious days of $24 oil and $250 gold and $2.00 wheat. Deficits, debt, low interest rates, and hyperactive printing presses are the culprits and we are trapped by unfunded liabilities into keeping the Dollar low to repay debt with Monopoly money. We'll have a brief outbreak of stronger Dollar before the election to throw a lifeline to the incumbents, then the Dollar falls again with no predictable bottom.

Inflation Triangle Dilemma: Dollar / Oil / Euro

"Let’s start with Europe, thanks to rising oil and food costs, inflation is rising fast in the Eurozone. To combat this inflation, ECB president Trichet said they may raise interest rates next month."

Trichet and ECB have inflation because they also have been devaluing their currency, preferring liquidity injections. When money is printed faster than GDP growth each unit becomes worth less against commodities with intrinsic value, like oil, gold, or wheat.

As for Bernanke, eventually he might realize that inflation is what is weakening the economy, distorting the normal balance of consumer spending by energy and food taking more than their normal share, causing other sectors to have less available. A couple of quick 25 bp rate hikes, to partially undo the erroneous 75 bp cut after the Asian meltdown, would drop oil to $100 and provide a $160 billion annual stimulus to other sectors of the economy without raising deficit and debt and while lowering trade deficit.

For this week, things will be simple. News that increases the liklihood of FOMC cutting rates will sink the Dollar and sppike commodities; news that makes it less likely that the FOMC will cut rates will keep things flat; news that makes it likely FOMC will raise rates will strengthen the Dollar and lower commodity costs. With faithbased fiat currencies the high priest, Gentle Ben, is also the prophet.

How Does an Oil Crisis Impact the Dollar?

Interesting piece, but not sure that lessons from the Arab oil embargo and the Irani oil embargo are of much use to us now. Better information comes from watching the three-way dance among Bernanke, the Dollar, and oil, as that has predictive value. Fed funds look stable for a few months, then likely to rise this fall, which will strengthen the Dollar, which will drop oil to $100 and gas below $3.00 so incumbent politicians have a snowball's chance of being re-elected.

Add to this that Trichet will continue quietly devaluing the Euro through his printing presses and the Dollar doesn't look bad in the EUR/USD pair through November, at least. After that Bernanke may turn into Paul Volcker or he may finish destroying the economy.

Weekly Market Commentary: May 19th - May 23rd

Thanks for the information. Well done.

U.S. Dollar Paradigm Shift Underway

"Call me the optimist, even a contrarian, but selling the US short is a foolish thing to do after the proverbial toilet has already been flushed."

The flushing is ongoing, the recent Deficit Stimulus Act, liquidity injections, BSC guarantees, and last week's rate cuts still washing over us, with more rate cuts, more bailouts, and congress tripping over themselves to come up with more ways to buy our votes with the grandkids' money.

Gold is useful as a standard, a way to recognize that the Dollar has lost 3/4's of its value in under eight years whil the Euro has only lost a half. Without the commodities, we would have no reference for the incompetence of our leaders and bankers.

Burst Bubble? Commodities' Long-Term Story Remains Intact

Good piece and I agree with your analysis of the fundamentals. What I'm seeing the last couple of days is profit taking turning into a lemming rush over the cliff. Just a guess without charting, but Dollar $1.45 and gold $800 should be solid bottoms, about 20% off the tops.

In an election year with congress and the candidates bidding for votes with borrowed money, this is temporary and I see it as an opportunity.

$200 Oil - Who's Going to Pay For It?

More of "Blame everyone but the American voter and his love for Free Lunch." Oil moves inversely to Dollar strength, which has dropped about 75% to gold since VooDoo Economics arose from the ashes in '01. It is not a coincidence that the Dollar sets low records at the same time oil sets high records and gold and silver and copper and wheat are near their tops.

For today's breaching of $110 oil, thank Ben Bernanke and $200 billion in freshly printed money yesterday or blame the $160 billion Deficit Stimulus Act signed a few weeks back, then anticipate, as traders do, that the FOMC will further slash rates and weaken the Dollar even more next week. We are doomed. $1.60/Euro is easily in sight.

Why $100+ Oil is Here to Stay

Interesting piece, but I would suggest that oil has risen little relative to gold and that the price increase is almost purely driven by the dollar, as shown by oil being in the fifties when Bernanke was raising rates, then soaring to around a hundred as Bernanke cut rates and the federal budget deficit widened. An easy test for my theory is to see see how much oil rose in CAD or EUR since inauguration day, 2001, when oil was $24, less than a quarter its current cost. For price increases of commodities to be seen as a supply/demand function would require them to appreciate at similar rates worldwide and to be immune to Greenspan/Bernanke rate tinkering.