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The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

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From Here to Eternity

We are entering a golden age in commodity prices. In the past two months, gold has become much more precious as it surged more than $100 dollars and has topped $800 an ounce for the first time since 1980. Crude oil has also skyrocketed and is trading at peak levels of as high as $96 per barrel. Where do prices go from here, Gold at $1000 per ounce and crude oil over $130? It's a real possibility. Our economic reality is based on a slowing GDP of 4%, unemployment creeping above 5%, and a dollar that continues to depreciate. The US dollar index is trading below the critical level of 77, over a 4% decline since the Federal Reserve began to cut rates in September. At the same time oil prices have been soaring on the weakness of the dollar, as well as continual threats to oil supplies from the Middle East. Quietly, however, we have the Chinese who right about now are contemplating whether or not it may be time to dump their large pile of US Treasuries and instead build up their gold reserves. I believe this would ultimately kill the dollar. We are living in some interesting times to say the least. Hold on, tight.....

It's no surprise that gold and oil prices are trading at such historic levels not seen in over 25 years, as the dollar continues to plummet. The housing bubble has just begun as defaults on US sub-prime mortgages continue and foreclosures are increasing throughout the nation. The Fed has shifted focus from inflation to housing, and continues to weaken the dollar further as it slashed rates another quarter point, to 4.50%. Meanwhile, commodities continue to impose serious inflation concerns at these towering levels, and global worries about terrorism and geo-political tensions continue to shadow our economy. The word around the camp fire seems to be recession for 2008, and that's being optimistic. Then there is China which is seriously considering selling its US Treasuries, which are estimated at $1.3 trillion dollars, if the US congress passes a bill that would impose a 20% tariff on goods imported from China. The flight from the dollar would be catastrophic, causing a ripple effect throughout all global markets. Add to that mix, Iran which holds one of the largest oil reserves in the world, and who are also threatening to shutdown their supply if the UN imposes sanctions due to their relentless pursuit of a nuclear energy program. Iran accounts for about 5% of global supply, about 4 million barrels of crude which they ship all around the world, except here in the U.S. The oil war game that is going on with Iran is leaving the US economy vulnerable with the ever increasing shocks in energy prices. They have undoubtedly added to the overall price of crude oil everywhere. If things were to escalate through military intervention and Iran shutdown production completely, oil prices would most likely reach $130 per barrel. But that maybe the least of our problems as Russia, China, and some of Europe have built strong relations with Iran and are big consumers of their oil. They would most likely oppose any efforts other than diplomacy, which has so far been ineffective.

Today's historic levels in gold and oil are therefore not the result of mere speculation. There are solid fundamental reasons behind it all. Record demand for oil from the likes of China will only increase in the years to come. Continuing threats to the supply of oil from Iran, or even from Nigeria, where pipelines are constantly being blown up and kidnappings on oil workers run rampant, will only further curtail oil production. The higher levels in oil will also increase prices in gold as it always moves in line with oil prices. A weakening dollar pressured by surging commodity prices will continue to have more investors hedging against inflation. So, it seems very likely that gold could soon be at $1000 an ounce. Many argue that the gold prices have not run away in real terms as much as people perceive. After adjusting inflation, gold prices would have to surpass $2000 an ounce to break the record of $850 an ounce, set in January 1980. Ironically, there are many similarities between the factors that propelled oil and gold prices back then, like the oil embargo and high inflation. So, the overall outlook then is still the same. Although there will be plenty of volatility in the markets in the months to come, opportunities will also arise for the savvy investor. Strong demand for this sector will continue to increase. I believe a weakening dollar, high oil prices, and continual global tensions will only push gold and oil prices much, much higher. I believe that looking ahead to 2008, gold and energy prices will continue to make headlines and should certainly have a place in your portfolio. If you would like a free brochure on participating in Gold and Oil Futures and more information on the strategies we're implementing to participate in commodity trends please contact me at oliver@wisdomfinancialinc.com.


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