Friday, October 23, 2009

Oil, The Dollar, and The TRUTH About Inflation

Oil at $80: That's good news and bad news.
By Paul R. La Monica, editor at large
Of course, the knee-jerk reaction is to declare that rising oil prices must be a bad sign. After all, increased energy prices could be considered the equivalent of a big fat tax increase for an already cash-strapped consumer.

On the other hand, oil prices were hovering around a low of near $30 a barrel back in February. And at that time, the average price of gas was below $2 a gallon. But how good did you feel about the economy back then?

Fears about a massive wave of big bank failures and another depression were running rampant. So cheaper oil and gas were little consolation.

It's hard to deny that things simply feel better now than they did seven months ago. The economy may still be in rough shape but few are predicting a financial apocalypse.

Stocks have soared in the past few months because of renewed expectations of a global economic recovery, and the spike in oil prices is also a reflection of these hopes. Sure, there are some out there who are writing off the rise in oil as another example of momentum traders playing the evil speculation game.

But many commodity experts argue that the main reason oil prices are rising is because there are signs of increased demand for oil from emerging markets such as China and India as well as the U.S. and Europe.

What's more, the continued weakness of the greenback is helping to push oil higher because oil is priced in dollars -- despite the occasional rumor to the contrary.

And the dollar's weakness is, to a certain extent, a byproduct of investors flocking to riskier assets like stocks and commodities because of the aforementioned recovery hopes.

So the most important question to ask about oil probably shouldn't be whether rising prices are bad or good. Instead, it should be this: How high do oil prices need to go before higher prices are no longer a sign of recovery but something that can actually threaten the recovery?

Rising Oil prices are NEVER good for the economy Period. It is absurd to even make the suggestion. This entire piece of financial "journalism" above is but one more effort to confuse the public into maintaining "CONfidence" in the crumbled economy and the clowns in Washington running it into the ground.

It is excruciatingly amusing that the writer considers the falling US Dollar's effect on Oil as an afterthought and attributes the Dollar's weakness to a flight to "riskier assets" like commodities. The financial press are clearly "coached" by the government to report Oil prices relative to rising and/or falling demand with regards to the expectations of "economic recovery". It is a Bozo No-No to suggest that Oil prices are rising because of the weakness in the US Dollar caused by the government's flooding the globe with them.

And speaking of "economic recovery". Since when is an economic recovery defined by phony bank earnings, no revenue growth, no sales growth, and no jobs growth? Beating earnings "expectations" does not a recovery make, but I digress.

The price of Oil is clearly the result of the value of the US Dollar. If you doubt me, please take a moment to look at the two charts above. Note that the price of Oil peaked in July of 2008 at $147. At the same time the US Dollar index bottomed at 71. As the Dollar rose through the last six months of 2008 on the false sense that it was a "safe haven", the price of Oil fell dramatically. As Winter turned to Spring in 2009, the Dollar rally peaked near 90 and Oil bottomed near $40. As the US Dollar began it's now seven month descent, Oil began it's seven month ascent. It's as clear as the nose on your face. "Demand" for Oil has had NOTHING to do with the rise in the price, because supply has been constant if not "plentiful" over the past 12 months. The World has a complete understanding of what the clowns in Washington are doing to the value of the US Dollar. As the value of the Dollar falls, the cost of goods in Dollars increases. It is an undeniable economic fact.

Inflation: In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

Inflation and the price of Oil. Inflation is far too often blamed on the rising price of "energy". Conversely, falling inflation is far too often credited to falling energy prices. The government have become "wizards" at hiding "real Inflation" behind rising and falling energy prices. Over the past year as the government has flooded markets with Dollars, the government has used the year over year disparity in Oil prices to offer the unassuming public the notion that Inflation is in check, even falling dramatically at times. This has worked to great advantage to the government "con-job" that has kept the massive growth in the money supply "hidden" from a blind public. This lie is days away from being exposed for the true fraud that it is.

Year over year "drops" in the price of Oil are about to come to a screeching halt. As this anomaly passes before us, the real spectre of Inflation is going to hit us like a sledgehammer to the side of the head. An inflationary knockout blow is just behind the curtain.

The notion that Inflation is being held in check, even falling, has been being squeezed the past two quarters as Oil prices have risen off their lows. What has been sold to the public as "signs of growth" has actually been Inflation rising to the surface. Consider:

In June 2008 Oil closed at $140.

In June 2009 Oil closed at $71.49.

The price of Oil dropped $68.51 year over year, or -49%.

In September 2008 Oil closed at $100.64.

In September 2009 Oil closed at $70.61.

The price of Oil dropped $30.03 year over year, or -30%.

In October 2008 Oil closed at $67.81.

In October 2009 [thru Oct 22] Oil closed at $81.19.

The price of Oil rose $13.38 year over year, or +20%.

SUDDENLY, between September and October of this year, the year over year swing in the price of Oil has gone from DOWN 30% to UP 20%. The government cover for the rate of inflation is about to be exposed naked as a jaybird. If the public has been "led to believe" over the years that the rate of Inflation is tied to energy prices, it will be difficult for the financial media to explain away the explosion in the rate of Inflation when Octobers PPI and CPI are released in November.

The Day of Reckoning is about to arrive for the US Government. It has been hiding behind rigged Inflation statistics and lies for months, years even, and now that lie is about to be exposed to an unsuspecting American public. The rest of the World of course has been on to this scam for sometime now, and has prepared themselves by buying Gold at a rapid pace in anticipation of the US Government's Inflation cover being blown.

The US Government has it's back firmly against the wall, options going forward are limited. They could tank the stock market and thus put an artificial bid under the Dollar to arrest the rise in Oil [and Gold] prices. But going down this road destroys the sense of recovery the rising stock market has given the American public, and will crush their bubbling "recovery expectations". Or they can take it like men and accept the consequences for their meddling in the markets and their flooding of the globe with funny money. This of course would ignite the hyperinflation scenario so many have feared and warned about for the past nine months. Of course, that scenario will play out eventually no matter the choice the US Government makes here.

What's the public's best option? No matter what the government chooses to do, or pretend to do, the public's ONLY and BEST option, from here to as far as the minds eye can see, is to simply buy Precious Metals.

Gold and Silver remained pressured today by a falling Yen, and an overbought Euro. Rising existing home sales [courtesy of the governments $8,000 tax credit] lent a bid to the floundering US Dollar this morning. The bid in the Dollar attacked the overbought equities markets in a market choreography reminiscent of a bad daytime soap opera.

The Yen has tested and slipped through the first line of support at 91.75 on the Yen/Dollar chart. A move lower to 92.50 is now on the Yen's radar.

Gold and Silver continue to consolidate recent gains in spite of the blah-blah swirling around them in the markets and the economy. Gold remains tightly wound between 1067 on the upside, and 1042 on the downside. Silver wound equally tight between 17.93 on the upside, and 17.17 on the downside. Both will face a fierce fight and test support as we move forward towards next weeks options and futures expiration's. Options on futures expire Tuesday the 27th with last day to trade futures on Thursday the 28th. First notice for November Delivery is on Friday the 31st. Gold and Silver, seasonally, and on average, both tend to bottom hard at the end of October and the beginning of November. Time is running out for the shorts, an Inflation time bomb is ticking louder by the day.

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