The latest Consumer Price Index readings just splashed cold water all over the hot rally we’ve been enjoying.
The Labor Department says gasoline prices jumped 0.9% in January. That, in turn, pushed consumer prices up 0.2% across the board…
For the trailing 12 months, inflation is rising at a 2.3% clip.
The Fed would have us believe this is within its target levels, and that its liquidity pumps should stay on full throttle for two more years.
But the rise in gasoline prices is worse than the standard inflation measure (CPI) tells us…
Gas prices have risen from $3.32 to $3.58 since the start of 2012. That’s a 7.8% jump. And it means real consumer prices have risen a lot more than 0.2%.
The gold market knows this.
That’s why gold prices surged the minute the Fed announced its reckless intention to keep interest rates low until 2014.
Gold is better understood as an inflation hedge than a safe haven: Gold prices don’t necessarily rise in times of crisis — but they do very well when inflation expectations are in the rise.
It’s often said that a news item in and of itself is not what’s important; it’s how the market reacts to the news that matters.
So while Bernanke’s interest rate decision is widely believed to be supportive of the economic recovery and the perpetually beaten-down housing market, gold is saying otherwise.
So is oil, for that matter.
And it is oil that has far greater implications for the U.S. economy that Bernanke is so intent on helping…
Economic history buffs know that oil price spikes tend to precede recession:
Oil price spikes brought on by the Bretton Woods in 1971 and the OPEC Oil Embargo of 1973-1974 preceded recession.
The Iranian Revolution (1978-1979) and the Iran-Iraq War (1980-1981) each led to separate bouts with recession for the U.S. economy, according to the National Bureau of Economic Research.
Oil prices doubled within months of the start of the first Persian Gulf War in 1990. Economic recession began in July of 1990.
Oil prices topped out at $147 a barrel in the summer of 2007. And the U.S. economy was in recession again in less than year.
(The financial crisis was a contributing factor to this last recession, but plenty of economists say that high oil prices contributed to the bursting of the housing bubble, which brought on the crisis.)
I’m sure we could make a compelling case that the continued challenges for the U.S. economy are due to persistently high oil prices.
But I know that another spike for oil prices would soak up what little surplus we have and send the economy right back into decline.
The most frustrating part is that the United States has the resources to offset a spike in oil prices: an immense surplus of natural gas that is highly valued by other countries.
The $2.70 per Mcf we pay for natural gas in the U.S. is worth $15 in China and $17 in Japan.
And yet we refuse to sell — or use! — this incredibly valuable natural gas supply.
We have so much that natural gas companies like Chesapeake (NSYE: CHK) are shutting down production because it’s no longer economical. That’s insane!
Canada has a natural gas surplus, too. But instead of letting it sit in the ground, Canada is actively trying to sell it to the highest bidders, like China. They’re even getting China to help pay for a pipeline and LNG terminal to export natural gas to the East.
It goes without saying that the companies involved are about to make some windfall profits.
But you won’t hear about this kind of deal here in the U.S.
We’ll let our vast, undervalued natural gas reserves sit in the ground rather than use them to boost growth and as protection against rising oil prices, inflation, and recession.
Sell natural gas to the Chinese? Use it ourselves? Not in America…
Enjoy your weekend,
Briton Ryle
Analyst, Wealth Daily
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