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Lost amid the hoopla after the Dow
recently achieved a milestone in closing above the psychologically important
13,000 barrier is another, more significant benchmark. Gasoline prices hit a
record seasonal high this week. The average price of gasoline across the
country is now $3.74, the highest it’s ever been at this time of year.
Offsetting the steep rise in prices for
crude oil and gasoline has been a collapse in the price for natural gas. A
glut of natural gas inventory along with continued weak demand following the
credit crisis has pushed natural gas prices to their lowest levels in a decade.
This in turn has helped mitigate electricity and home heating costs this
winter and has also lessened U.S. dependency on coal for power generation.
Were it not for the ultra low natural gas price,
rising gasoline and crude oil prices would be crushing the economy by now.
 
While low NG prices have been a blessing
to consumers, it also carries the seeds of a curse. Natural gas demand is an excellent
indicator for the underlying economic health of the nation. As such, the low
NG prices are a reflection of low demand and suggest the internal state of
the economy isn’t as strong as the government would have us believe.
This theme will become more evident as we enter 2013 when the bullish effects
of the 4-year Presidential Cycles have subsided and we enter the final
“hard down” phase of the 120-year cycle scheduled to bottom in
late 2014. But for now the low natural gas price is more a help than a
hindrance.
Low NG prices can only go so far in
staving off the consequences of higher pump prices, however. Fuel prices
represent one of the biggest expenditures for most working class families and
the rising prices at the gas pump will weigh heavily on middle class wallets
this spring. The impact will be especially hard if gas prices continue rising
into the summer driving season as most expect. An increase in the gas price
is essentially a tax and when fuel costs rise, consumer spending tends to
drop incrementally. The last time the national average price-per-gallon of
gas exceeded $4/gallon was in 2008, which coincided with the beginning of the
credit collapse.
Last May, the national average gasoline
price came just three cents shy of the psychological $4/gallon level before
beginning a 7-month decline to $3.22 (see chart below). This time around
consumers might not be so lucky. If the fuel price significantly exceeds
$4/gallon this spring, a chain reaction will be set in motion which could
imperil the economic recovery.
Even more significantly, rising fuel
prices will push up retail food prices even further. As the following graph
shows, the Consumer Food Price Index is approaching the all-time high levels
from just before the 2008 credit collapse. A further increase in oil and
gasoline prices would push food prices up to and possibly beyond this
critical threshold.
Moreover, every $10-per-barrel increase
in oil costs equals a 0.2% loss in Gross Domestic Product (GDP) over the
course of a year, according to Mark Luschini of the
firm Janney Montgomery Scott. Credit Suisse
estimates that for each 1 cent increase in a gallon of gasoline, $1 billion
in consumer spending is directed away from other goods and services annually.
Writing in the March 12 issue of Businessweek, David Rocks wrote, “Retail sales in
2012 will probably total $4.8 trillion; so a 50 cent jump would siphon away
more than 1 percent of those dollars – $50 billion – that might
otherwise have gone to Wal-Mart Stores, Gap, or McDonald’s.”
The economic and political importance of
high food prices can’t be underestimated. To take one example, high
food prices were the catalyst for last year’s outbreak of revolution in
several Middle East countries. The region once known as the Fertile Crescent
is heavily dependent on imported grain and rising fuel costs contributed to
the skyrocketing food prices which provoked the Arab revolts. Annia Ciezadlo, in her article
“Let Them Eat Bread” in the March 23, 2011 issue of Foreign Affairs wrote: “Of the
top 20 wheat importers for 2010, almost half are Middle Eastern countries.
The list reads like a playbook of toppled and teetering regimes: Egypt (1),
Algeria (4), Iraq (7), Morocco (8), Yemen (13), Saudi Arabia (15), Libya
(16), Tunisia (17).”
Indeed, high
food costs have long been a major factor in fomenting popular revolt. The
French Revolution of the late 1700s originated with a food shortage which
caused a 90 percent increase in the bread price in 1789. Describing the
build-up to the Reign of Terror in France of 1793-94, author Susan Kerr
wrote: “For a time, local governments attempted to improve distribution
channels and moderate soaring prices. Against this backdrop of rumbling
stomachs and wailing hungry children, the excesses and arrogance of the
nobility and clergy strutted in sharp contrast.”
This
historical event has an obvious parallel in today’s emphasis on the
elite “1 percent” versus the “99 percent.” The French
government of the late 18th century attempted to assuage the pain
caused by soaring food prices, but ultimately this effort failed. Although
the U.S. government attempted for a time to keep fuel prices low, it has
since abandoned all effort at stopping speculators from pushing prices ever
higher.
An
undercurrent of popular revolt is already present within the U.S. as
evidenced by the emergence of the Tea Party and by last year’s Occupy
Wall Street movement. This revolutionary sentiment has been temporarily
suppressed by the simultaneous improvement in the retail economy and the
financial market rebound of the past few months. The fact that this is a
presidential election year, replete with the usual pump priming measures and
underscored by the peaking 4-year cycle, has been an invaluable help in
keeping revolutionary fervor suppressed for the moment. But what those within
the government and financial establishment have failed to consider is that
once the 4-year cycle peaks later this year, we enter the final “hard
down” phase of the 120-year cycle to bottom in late 2014. This cycle is
also known, in the words of Samuel J. Kress, as the “Revolutionary
Cycle.”
Regarding the
120-year cycle, Kress wrote:
“The
first 120-year Mega Cycle began in the mid 1770s
after a prolonged depressed economy and the Revolutionary War which
transformed American from an occupied territory to an independent country as
we know the U.S.A. today. The first 120-year cycle ended in the mid 1890s after the first major depression in the U.S.
and the Spanish American War. This began the second 120-year cycle which
transformed the U.S. from an agricultural to a manufacturing based economy
and which is referred to as the Industrial Revolution. The second 120-year is
scheduled to bottom in later 2014 to begin the third (everything comes in
threes). If history, an evolving cycle, continues to repeat itself, the
potential for the third major depression and a WWIII equivalent exists and
the U.S. could experience another transformation and our life style as we
know it today.”
Kress goes on
to observe that the three elements which govern our lifestyles –
political, economic and social – will come into play as the current
120-year cycle bottoms. “The third [120-year bottom] scheduled for
later 2014 (‘everything comes in threes’) should be a social
revolution,” writes Kress. “Could this be the demise of
capitalism as we know it today? The 120-year Mega Cycle could also be
referred to as the Revolution Cycle, [with] 2014 the Revolutionary
low.”
Since 2008, when gasoline first reached
$4/gallon, U.S. demand for gasoline has dropped. According to oil analyst
Lawrence Eagles of JPMorgan, weekly U.S. gasoline demand is
“tepid” and is expected to fall this year by 100,000 barrels a
day, even as the economy expands by an expected 2.2%. This has led many to question
why prices are still rising if demand is so weak.
The media’s favorite explanation
is that East Coast refineries are shutting down due to a lack of
profitability. Mention is also frequently made of the crack spread and the
problems involved in using Brent crude instead of West Texas Intermediate
(WTI) oil for refining. The saber-rattling over a possible war between Israel
and Iran has also been blamed for rising fuel prices. But another reason is
likely behind oil’s continued rise and it has a direct impact on the
current and future state of the global economy.
Richard Hoskins, author of War Cycles/Peace Cycles, has shed some
penetrating light on this issue. He has pointed out that rising oil prices
force world merchants to borrow new money into existence to pay the increased
oil prices, thereby staving off the effects of deflation. The same can also
be said of individuals, who are forced to spend more money into the economy
instead of hoarding it, as has been their wont in recent years. In an
interview last year Hoskins told me, “When you raise the oil price or
lower the oil price that’s the same as adjusting the money supply and
it’s done so very fast.”
The S&P 500 Index (SPX) and the
gasoline futures price have been trading essentially in tandem with each other
for the last several months as the following chart illustrates. This is one
example of how the latest stage of the recovery which began in March 2009 is
being managed, not by quantitative easing or monetary policy, but by fuel
price manipulation.
The conundrum of rising fuel prices in
the face of falling demand can ultimately be explained by the critical fight
against deflation by the world’s leading governments, corporations and
central banks. The oil price is being used to re-inflate the economy and
force spending by preventing savings and the hoarding mentality. When it
comes to managing the economy the most important consideration isn’t so
much the supply of money as it is the velocity of money. And money can be
made to quickly change hands when prices are artificially raised through
manipulation of the oil market, as we are finding out.
Despite this so-far-successful attempt
at staving off deflation, it would do us well to consider that every bull
market carries within it the seeds of its own demise. Artificially high oil
and gas prices can only be pushed so far before the strong undercurrent of
deflation breaks the upward trend of prices and forces them to much lower
levels, just as we saw in 2008. The current cyclical bull market will be
powerful while it lasts but is living on borrowed time: rising high food and
fuel prices could deliver the death knell by the end of this year when the
last of the Kress yearly cycles peaks (the 4-year cycle).
Gold ETF
The iShares
Gold Trust (IAU, 16.27), our proxy for gold, has made no net progress in
the last two weeks since its Feb. 29 sell-off and made a slightly lower low
on Tuesday, Mar. 13. After falling under its 30-week moving average, IAU now
looks like it may test the critical 60-week (300-day) moving average. The
60-week moving average has turned back declines in the past, including most
recently November-December 2011 correction.
IAU needs to show us that it has
bottomed, which it can do in the next few days by re-establishing support
above the technically significant 60-week MA, which intersects the 15.60 level
in the daily chart.
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In my latest book, “Gold & Gold
Stock Trading Simplified,” I remove the mystique behind gold and gold
stock trading and reveal a completely simple and reliable system that allows
the small-to-mid-size trader to profit from both up and down moves in the
mining stock market. It’s the same system that I use each day in the
Gold & Silver Stock Report – the same system which has consistently
generated profits for my subscribers and has kept them on the correct side of
the gold and mining stock market for years. You won’t find a more straight forward and easy-to-follow system that
actually works than the one explained in “Gold & Gold Stock Trading
Simplified.”
The technical trading system revealed in
“Gold & Gold Stock Trading Simplified” by itself is worth its
weight in gold. Additionally, the book reveals several useful indicators that
will increase your chances of scoring big profits in the mining stock sector.
You’ll learn when to use reliable leading indicators for predicting
when the mining stocks are about o break out. After
all, nothing beats being on the right side of a market move before the move
gets underway.
The methods revealed in “Gold & Gold
Stock Trading Simplified” are the product of several year’s worth of writing,
research and real time market trading/testing. It also contains the benefit
of my 14 years worth of experience as a
professional in the precious metals and PM mining share sector. The trading
techniques discussed in the book have been carefully calibrated to match
today’s fast moving and volatile market environment. You won’t
find a more timely and useful book than this for capturing profits in
today’s gold and gold stock market.
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is the editor of Gold & Silver Stock Report, published each Tuesday and
Thursday. He is also the author of numerous books, including most recently,
“Gold & Gold Stock Trading Simplified.” For more information visit
www.clifdroke.com
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