Gold Seek: The Epic Battle over Crude Oil and the US$ - by Gary Dorsch

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The Epic Battle over Crude Oil and the US$ - by Gary Dorsch

Why are Ahmadinejad and Chavez laughing? Oil prices are up 56% this year, after nearly reaching $100 per barrel. At the same time, the US Dollar is mired at a 20-year low, with the US economy teetering on the verge of a recession. The US dollar has fallen over 50% versus the Euro since 2002, and oil prices are nearly five times higher over the same time period. Increasingly, the US dollar’s reserve currency status is looking very fragile. Perhaps, all that’s left supporting the greenback is America’s military might. “They get our oil and give us a worthless piece of paper,” Ahmadinejad told OPEC ministers in the Saudi capital of Riyadh, insulting the US dollar.The Federal Reserve has allowed the MZM money supply to expand by $850 billion this year, up 13% from a year ago. The broader US M3 money supply is 15.8% higher, it’s fastest in history, monetizing the prices of crude oil and gold, key hedges against inflation, to all-time highs.

Explaining the Fed’s reason for ignoring sharply higher food and energy prices, on October 20th, Federal Reserve governor Frederic Mishkin said, “Changes in price indexes without food and energy provide a clearer picture of underlying inflation pressures. If the monetary authorities react to headline inflation numbers, they run the risk of responding to merely temporary fluctuations,” he said. At the same time, Mishkin said it was the Fed’s job to “counteract negative shocks to the economy,” from high oil prices, suggesting a further expansion of the money supply.

Clearly, the US Treasury expects a quick fix to the Global “Oil Shock” from King Abdullah to cap global oil prices, by boosting Saudi oil output next month. That would permit the Fed to lowers its lending rates and inject more dollars into the hands of Wall Street dealers, while keeping the “crude oil vigilantes” at bay. But a move by the Saudis to knock oil prices lower could also inflict damage on its own stock market, which is just starting to shake off a nasty two year hangover.