Oil, Gold, Batman and Leo Tolstoy

OKAY, READERS, LET’S TAKE A LOOK at what’s going on. The price of oil is nearing $100 per barrel and will probably break through that level any second now. The price of gold is nearing $825 per ounce. That should go higher. So this is what we know. Not pretty, right? Let’s take a look now at how much more we can expect.

Oil and Gold Still Rising

My Outstanding Investments colleague, Kevin Kerr, and I both expect to see a price increase to $150 for a barrel of oil, and even $200 oil would not shock us. Expect to pay $5 or more for a gallon of gasoline within 18 months, as well. It is part of the Peak Oil future, and that future is now. Darn, we were hoping to have more time. But then again, our society has been wasting time for two generations, since the early energy warnings of the 1970s. And while we are on the topic, we expect to see gold at $850 per ounce in the not-too-distant future. Then $900 and $1,000 within 18 months, if not sooner.

If we have your attention, we regret having to say all of this because it means that the U.S. dollar will be losing value in a precipitous drop during 2008. It will not be a pretty sight. Just imagine the loss of purchasing power and the associated destruction of capital that our society collectively will experience as this occurs. Imagine a scenario of asset deflation and price inflation. What can you do? We’ll discuss that later in this article.

Superheroes, Light and Dark

Yes, oil and gold have risen in price and will almost surely rise some more. In the marketplaces and bazaars of the world, where oil and gold are traded, it is as if a well-muscled superhero is leaping into the sky, blue tights shimmering and dark cape flowing, yelling, “Up, up, and away!” But is this masked character, rising upward and representing the prices for oil and gold, one of those good superheroes who are dedicated to helping mankind? Can higher prices for oil and gold somehow be good for us all? Or are we dealing with one of those evil superheroes, a vicious soul who has been corrupted by the darkest forces of the universe?

As no less noble a character than Batman once inquired, as he looked over a room full of devices that he was considering adding to his battle rattle, “Does this come in black?” Thus, to bring Gotham toward the light, its mythical warrior-savior wears the color that absorbs all wavelengths and reflects none. The Dark Knight wears black. How gothic.

Hard Questions About Oil and Gold

Ask yourself, dear readers: Are the prices of oil and gold rising for simple reasons? Are the upward price trends merely tactical events in the daily battle space of the market place? Or are oil and gold now subject to certain inexorable forces of history, no longer governed by the old rules of a political and monetary world that is now obsolescent, if not obsolete? We have to wonder. These are hard questions.

Will the political leadership and monetary authorities interpret the fast-rising prices of oil and gold as warning signals of imminent and profound trouble? What about those who hold positions of trust and responsibility within the media, business, academe, and even religion? Will this nominal and — we regret to say, somnolent — leadership cadre ignore these key signals, while they waste time counting their retirement points and dismiss these glaring klaxon signals of rising prices as mere “trading activity,” or worse?

However ineptly the leadership interprets or misinterprets the message, there is no denying that there is trouble within our economy, if not within what passes for energy and “money” in our world. At Outstanding Investments, we work to position ourselves and our investments away from the troubles. That is what distinguishes the investment community from the rest of the sorry lot. We are playing with our own money on the table. We don’t want to lose it.

But still, we have to ask if leaders anywhere can act in time to change things for the better. Is there time to plan and implement change, no matter what it is that must be accomplished (and that is very much)? Does the leadership cadre have the knowledge, let alone the wisdom, even to understand the message and the problem?

The End of the Postwar Era?

When we see the prices of oil and gold rise so quickly and inexorably, we wonder if these trends reflect some profound underlying change to the firmament of our national and political existence. A few weeks ago, while I was in Houston for the conference of the Association for the Study of Peak Oil & Gas (ASPO), I had a conversation with a retired employee of the CIA. Our conversation drifted to the question of whether or not the global political construct of the world post-World War II was finally coming to an end. After 60 years of running on the formerly immense momentum of that victorious war, is it all finally grinding to a halt as the U.S. literally runs out of oil and its currency disintegrates in relation to gold? The former Soviet Union encountered severe oil shortages, ran out of money, and all but imploded within a matter of months. Is there some law of nature that declares that something similar could not happen to the dramatically overstretched U.S.?

Through the Eyes of Leo Tolstoy

Look at the basics. Clearly, the prices for oil and gold are rising. That is the easy observation. But are we witnessing a fundamental transformation in the alignment of all mankind, similar in a way to that observed and described by the Russian novelist Leo Tolstoy? Are the prices of these two critical commodities, oil and gold, reflective of the broader themes of war and peace, mankind’s ability to both hate and love, the artificial and the natural, the erotic and the sublime? Where will it all end, and how will it play out?

As the prices rise for oil and gold, are we seeing both sides of a clash between the most profound forces of God and nature? In the rising price trends for oil and gold, are we observing two opposing pathways through life? One era is ending, that of cheap energy and strong dollars. Another era is beginning. What era will that be? Yes, our oil and gold-mining stocks go up while the dollar-based world around us grows poorer. Would it not be better for our stocks to go up while the dollar-based world grows richer? Oh, if only it could be so.

Can You Buy Your Way out of Trouble?

In a Peak Oil world, you might not be able to buy your way out of trouble. Not even if you are rich. Yes, that’s the bad news, and it is very bad. And if you move all of your investments to foreign currencies, along the lines of what our old friend Jim Rogers has announced he is doing, you may still suffer the effects of the declining value of the dollar. If the U.S. economy is, as the analogy goes, the world’s economic locomotive, then this train is about to derail. Think of the looming Citigroup disaster as the financial warm-up act for the last great concert of the Woodstock generation.

Take long-term monetary mismanagement by the Federal Reserve, plus fiscal decadence at home by the U.S. Congress, and an unaffordable war abroad, and you have the ingredients for economic disaster. Stand by for a domestic recession, as the value of the U.S. dollar drifts downward. There will be pockets of prosperity, in export-related fields, such as some high-tech and large capital goods like commercial aircraft (thanks, Boeing). But if you don’t earn a living building Dreamliners, we suggest that you get out of debt fast, and out of dollars faster.

At Outstanding Investments, we think that some protective moves include owning gold or shares in gold miners. Or you could invest in one or more of the foreign currency or commodity-backed FDIC-insured certificates of deposit (CDs) that our friends at EverBank offer. We have to note that Agora Financial has a business relationship with EverBank, through which we promote EverBank products. But still, we assure you that we would not even mention the EverBank CDs if we did not believe that they are suitable investment opportunities for our readers. Check them out.

Until we meet again,
Byron W. King

November 15, 2007

The Daily Reckoning