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Precious Metals & Inflation
June 2, 2008

Are oil prices higher due to the Fed's rampant dollar debasement and the consequence of inflation?


"Inflation is a destructive distorter. it fuels speculation and hoarding, as well as misdirects investment into normally uneconomic activities or stops the flow of productive investment altogether as people and businesses clutch their cash. The political mood sours as prices go up and particular industries are harshly hit.

We now see all of this unfolding. The dollar debasement that the Federal Reserve began in 2004 and exacerbated in the aftermath of last summer's credit crisis is wreaking the havoc history told us it would. The world, as the media constantly report, is experiencing a shortage of food, and even when food is available, the rising prices are rendering it unaffordable to the poor. President Bush has announced an emergency food-aid package for hard-hit parts of the world.

Rants against speculators are growing louder and shriller. Oil's current crazy prices are not because of supply and demand; with the slowdown in global economic growth, oil inventories are doing quite nicely. So suspicion of market manipulation grows.

The airline industry, despite usually loaded planes, is drowning in red ink because of rising fuel costs. To break even, major carriers will have to cut their capacity by 20%. The auto industry is reeling. Buyers are suffering from gas-price sticker shock and are sitting on liquid assets until they get a better fix on where the economy is actually going.

Congress is full of proposals to tax windfall profits. On Apr. 30 the Wall Street Journal ran a front-page headline about how 'big agriculture' is making money hand over fist while the specter of hunger and malnutrition stalks the globe. Food shortages are being blamed on our binging on corn-based ethanol. But almost every other food commodity price is far, far above what it was last summer.

The political mood will get uglier when higher energy costs are passed on to consumers in higher electricity bills this summer.

Amazingly the roles of the Fed and other global central banks in all this are almost entirely ignored. John Maynard Keynes' 1919 observation still holds true: When inflationary forces are unleashed and the destruction is felt, not one person in a million will understand the inflationary process in play.

Inflation accounts for at least half of the price of oil today. We are not running out of the stuff. Recently an oilfield was discovered off the coast of Brazil that could hold as much as 33 billion barrels of oil. There are tens of billions of barrels of oil--not to mention gobs of natural gas--off our own coasts, yet Congress has declared 85% of the U.S. Outer Continental Shelf off-limits to exploration and drilling.

The dollar is the global currency (at least for now). When it falls in value the nominal price of commodities zooms up, with the poor being hurt disproportionately. When prices go up, people figure they better start storing foods and precious metals."

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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