High Gold Prices: It's the Oil, Stupid
By Staff News & Analysis - November 27, 2009

I'm constantly amazed at the inability of US economic and financial "expert policymakers" to understand the true reason behind gold's big move: OIL. The inflation adjusted high for gold was set in January 1980 at $2,290 an ounce. It is not a coincidence this high was set just after the oil crisis of the 1970s. The US was lucky then: it had Paul Volcker (pictured left) at the Federal Reserve and it had the oil reserves of Alaska and the North Sea coming online. The combination of Volcker's high interest rates and new domestic oil supplies saved the day. Unfortunately, neither of these two solutions will bail America out this time. Once again, as history repeats itself, gold prices are taking off after the 2008 oil crisis which saw oil prices of $145/barrel. Why is it so hard for the Harvard B-School "experts" and the pundits on CNBC to understand this very simple cause and effect? – Seeking Alpha

Dominant Social Theme: Let's get our facts straight!

Free-Market Analysis: This is an interesting article in Seeking Alpha, which is itself a very interesting site on finance and economics so far as we are concerned. Also, as readers may note, Seeking Alpha is not exactly a mainstream news site, however the argument being made in the article excerpted above is one that is made all the time by the mainstream media one way or another, so we think excerpting it fulfills the Bell's brief well enough. (The Bell's brief involves the analysis of mainstream monetary elite dominant social themes that mislead people into accepting false problems and unreal solutions.)

In this case, the problem – and it is one accepted by much of the media much of the time – is that gold is up (again and again) while the world's biggest fiat currency, the dollar, is headed down. (We don't see it as a problem, but much of the world does.) The author of the above article (excerpted), who is an engineer (and we don't mean to pick on him because it is a good and interesting – tough-minded – piece in many ways) believes that this monetary trend is an indication that the US government and its central bank are handling fiscal and monetary policy badly.

Thus, the idea that this article postulates is that if US policymakers were smarter and tougher, and certain steps were taken, the economic crisis as it relates to the dollar anyway would come to an end. It is important to note that the author does not really himself believe this is possible. He thinks that those in Washington today are idiots and that they will never get it right. He does believe the 1970s was salvaged by the tough minded Paul Volcker at the Fed and by the timely expansion of oil supplies. Here's some more from the article:

Gold was up $24 Monday morning, no doubt in part due to Iranian war games being held to show the extent to which they will try to protect their nuclear infrastructure. Faced with US forces on its western border (Iraq) and on its eastern border (Afghanistan), oil and natural gas rich Iran is clinging to their nuclear infrastructure in a last ditch effort to protect themselves from the fate of their neighbors. If protecting their homeland is the goal, Iran's rhetoric on the destruction of Israel was akin to shooting themselves in the foot. While Israel may or may not have the capability to take out Iranian nuclear facilities, it is clear the US must get involved if there is any hope to protect the strategic Straits of Hormuz through which much of the world's oil flows. However, it is not a given that the US can prevent Iran from bottling up the Straits. What will happen to oil and gold prices if this conflict takes place? What will be the corresponding impact on the US economy? For a country that uses 25% of the world's entire oil supply, and imports 65% of that, a war in Iran cannot be a favorable development.

In the meantime, US policymakers continue to print money as fast as possible thinking they can solve a commodity problem (oil) with monetary and fiscal hijinx. It cannot be done. Officials have high sounding debates about whether or not the biggest threat is inflation or deflation. Who cares. The biggest threat is America's reliance on foreign oil. It's the oil stupid. The U.S. imported 357,000,000 barrels of oil in September, 2009 sending $24,700,000,000 overseas. This continues…month after month, year after year. By God, when are US policymakers going to do something about this?

America is in serious trouble. Following George Bush, who I believe was the worst President in US history, we quite likely have a candidate for the 2nd worst President in Barack Obama. Bush was obviously tied at the hip to oil power and led us into the wrong-headed war in Iraq. While getting his hands on oil reserves might seem strategically logical for a country dependent on it, it took millions of barrels of oil off the market at precisely the same time that Chinese oil demand was skyrocketing. The result, in addition to supply demand problems, was an additional geopolitical risk premium being added to each barrel of oil and wah-lah! We have $145/barrel oil and record oil company profits.Too bad the rest of the American economy had to pay the price.

Bush's only attempt at energy "policy" was the idiotic ethanol mandates (mostly made from corn) while simultaneously slapping fees on imported Brazilian ethanol which is made more sanely from sugar cane. The ethanol mandates only exacerbated the country's inflation problem by causing massive dislocations in the food chain. Enter Obama and Energy Secretary Chu. Both are in love with the oxymoronic myth of "clean coal" and neither has done anything to reduce foreign oil imports. Obama has never uttered the words "natural gas transportation" and Energy Secretary Chu should give back his Nobel prize after famously being quoted as saying he is "agnostic" about natural gas transportation. How on Earth can the US solve its energy and economic problems when the two most important energy policy decision makers are "agnostic" about natural gas but are in love with the myth of "clean coal"? …

What can Americans do to protect themselves from the foreign oil crisis and a government that has declared war on its citizens and is intent on devaluing the dollar? Buy gold and silver bullion. Buy oil stocks such as Petrobras (PBR), Exxon Mobile (XOM), ConocoPhilips (COP), Chevron (CVX), BP, and StatOil (STO). The foreign oil companies are paying good dividends and can provide more upside due to US dollar weakness. Good luck with your investing, and if you care, contact your local Congressman or Congresswoman and implore them to support the Natural Gas Act and that you want them to adopt and support strong natural gas transportation policies. Otherwise, the American oil crisis will continue to push gold higher and higher. So hold on to your gold and don't sell it until you see the US adopt natural gas transportation. If that day ever comes, sell your gold because the US economy will thrive, inflation will fall, and balanced budgets will be possible. Natural gas transportation could usher in an era of unfettered economic prosperity that few people today can even imagine.

All of this is cogent, and yet for us it misses the REALITY of what is going on. We believe that high oil prices for the most part are a SYMPTOM of something much larger. And that, as Bell readers and feedbackers know, is the BUSINESS CYCLE ITSELF. From our perspective, the business cycle, as described in orthodox Austrian theory is undeniable. Every few decades in a fiat money cycle, the distortions caused by printing too much fiat money simply plunge economies into misery and ruin. The last time there was a significant shakeout was in the 1970s. People can argue over the trigger, of course, and the writer of this article seems to believe the 1970's trigger of near-economic collapse, and the current economic crisis were caused by a lack of a functional oil policy in the US. As we just stated above, we don't.

From our point of view, the shakeouts in the 1970s and today were inevitable and are a function of the economic system itself. Yes, we believe that these business cycle turnings are as constant as the tide. When gold began to move up in 2001, we started predicting along with the (much smaller then) hard money crowd that gold was going to go through US$1,000 and then higher. We figured maybe to US$2,000 or even US$3,000. We figured it would take about 15 years to get there, and that it wouldn't be a straight line by any means. But it would happen.

We still believe this to be the case. The fiat money system is far more damaged than it was in the 1970s and thus we figure the problems could last longer that it did during that terrible decade. And allowing for inflation and the desperate nature of Western fiat-finance, we think gold (and silver) could go very high indeed. What we DON'T think is that any of the neat reasons advanced by a plethora of self-serving pundits for the monetary dilemmas of the 2000s have to do, ultimately, with regulation, oil or a vacuum in American or Western leadership.

And so we return to the dominant social themes of the elite. One by one these themes and sub-themes float upwards like balloons, each carrying a convincing argument designed to mislead citizens and commentators and to distract them from what is really taking place. Yet Glass-Steagall (which divided up investment and commercial banks) was in full force in the 1970s and problems still occurred. There are energy and war shocks in every decade, but gold does not ascend in a parabolic curve except when the business cycle demands it. Western policy-makers do not suddenly lose their minds once every three or four decades. The 1970's economic chaos was a result of the turning of the BUSINESS CYCLE. The current economic dilemma is a result of the same phenomenon.

The writer of the above article believes that if America can "solve" its energy problems, then the country will be a good deal better off and the dollar will be salvaged. We think, unfortunately, this is beside the point. You can put in the best governmental policies in the world, but so long as your money system is based on nothing but paper, these shakeouts will occur at regular intervals. And history shows they will grow worse and worse over time until the given fiat regime collapses and something else takes it place.

After Thoughts

We hope a private gold and silver standard fills the vacuum that will be left as a result of the inevitable dollar collapse (whenever that occurs.) Of course, we are not clear on the timeline (don't believe anyone who is) but we are as comfortable predicting its eventuality as we were predicting in the early 2000s that the upcoming decade was going to feature higher gold and silver prices. We believe in the Austrian economic model as advanced by Ludwig von Mises and others. It hasn't let us down.