#1: The Big Squeeze from Crude Oil.
Oil prices toppled from recent highs, leading many people to breathe a big sigh of relief. The crisis is over, right? I don’t think so. In fact, while prices may zig and zag, I think 2011 will see worsening crises in both food and fuel.
First, the good news. Higher prices at the pump are finally having an impact on consumption. For five weeks in a row, drivers have bought less gas than they did a year ago. So there is a limit to how much Americans will spend. And one cure for higher prices is higher prices. Hopefully, lower demand will lead to lower prices.
Now for the bad news. The average price for gasoline in the United States is $3.77.
This is significant because gasoline is already 41 cents more expensive than at this point in 2008. And you’ll remember that 2008 was the year of the oil price spike. Gasoline peaked in July of 2008, at $4.11.
A chart of the unleaded gasoline contract doesn’t take into account local taxes that push prices up higher. But looking at a weekly chart, you can see how close we are to the peak:
It also looks like gasoline is breaking out to the upside. The real test will come during peak driving season this summer.
Higher oil prices are squeezing consumers mercilessly. If prices go much higher, estimates for economic growth, as measured by gross domestic product, will have to be cut.
In fact, it’s already happening. The International Monetary Fund recently lowered its estimates for U.S. growth in 2011 — to 2.8% from a previous projection of 3%.
#2: The Big Trend in Gold and Silver.
You’d have to be blind or a fool to ignore the big trend in precious metals these days. And sure, sure, that blind fool pool is obviously where CNBC gets many of its talking heads. But smarter investors can spot a big trend — a trend that remains intact after 10 years in gold and eight years in silver.
But how long can these uptrends last? Wall Street wants you to think these bull markets are about to peter out. But a bull market in metals can last a long, long time. Take a look at this chart from Mine Fund, which shows gold and silver tracked along their mean, or average, prices. These prices are adjusted for inflation.
(For an interactive version of these charts, click here: http://bit.ly/hlvwbE)
You can see that gold has enjoyed bull markets that were 20- and 40-years long. Silver once enjoyed a bull market that was more than 100 years long!
Now, the metals have also experienced long-term bear markets — particularly in silver’s case. And the good news for silver is it just came out of a bear market on a long-term basis. That means it could go a lot further.
Gold has been out of its bear market longer than silver, but still not for very long. I think its bull market could last for quite some time to come.
But here’s one thing to consider: The bull market in precious metals is like kryptonite to Wall Street. It shines the hard light of truth on the backstage machinations of the gray and powerful men who pull the strings of the world’s financial system.
These men and their mouthpieces want you to think everything is fine. The continued bull market in precious metals tells us that everything is not fine. With every penny that gold rises, fiat (paper) currency loses another sliver of value.
So what I’m watching this summer is just how high gold and silver can go. Summer is usually a slack time for precious metals. Maybe not this summer. Maybe this is the summer they boil over.
Why would that happen? Here’s one reason …
#3: The U.S. Dollar Is in BIG Trouble.
Let’s take a look at the action in the U.S. dollar and see where it’s going:
The U.S. dollar is going to test its support just above the 74 level, which it last tested in 2009. If that breaks, look out below!
Forces pushing the dollar lower include:
- The U.S. national debt exceeds $14 trillion and is climbing. Nearly 14 million Americans are unemployed. The economic “recovery” is propped up by easy money from the Federal Reserve, not real economic activity. This is not an environment that will lure foreign investors to put money into American markets.
- Three wars at once: The total dollar cost of the wars in Iraq and Afghanistan so far exceeds $1.171 trillion, and we just started a third war — Libya. Defense analysts estimate that the United States is spending $100 million a day in Libya. Just imposing a no-fly zone over Libya cost $400 million to $800 million for the initial strikes, with another $30 million to $100 million a week to patrol the area. Just one Tomahawk missile costs $1.4 million, and more than 178 Tomahawk missiles were fired on Libya.
- And then there’s the problem that fiat (paper) currencies can be printed at will. In 2008 the Federal Reserve increased the U.S. monetary base from just over $800 billion to $1.7 trillion in a matter of months. Actions like this by central banks around the world are shaking the faith of investors large and small in paper currencies and making hard currencies shine by comparison. You CAN’T print gold and silver.
How You Can Protect Yourself
The big trends in place are bearish for the U.S. dollar and bullish for commodities. So, you can protect yourself — and potentially profit handsomely — with an exchange-traded fund that tracks a basket of commodities.
There are a bunch of funds that will do this. One good one is the DB Commodity Index Tracking Fund, symbol DBC.
The DBC tracks a basket of popular commodities. Its top components include heating oil, Brent crude, gasoline, west Texas intermediate crude oil, gold, sugar, natural gas, copper, aluminum and zinc.
Take a look at a weekly chart of the DB Commodities Tracking ETF (NYSE:DBC):
The DBC is weighted toward energy, but there’s plenty of metals and agriculture in the basket as well. And all of these commodities are rising on A) the falling dollar B) a flood of easy money from the Fed and other central banks and C) ravenous demand for commodities from the emerging markets.
I think the DBC is going to at least $36.50 and probably higher. That’s a nice move for any portfolio, and a good way to protect yourself and profit from a potentially very hot and volatile summer.
Related ETFs: U.S. Oil Fund (NYSE:USO), SPDR Gold Trust (NYSE:GLD), iShares Silver Trust (NYSE:SLV), PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP), PowerShares DB US Dollar Index Bearish ETF (NYSE:UDN).
Good luck and good trades,
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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