Is oil up because gold is down?

May 9, 2008

I had a thought the other day… it could be crazy, but it also could just be crazy enough to ring true. Central bankers are up to their old gold manipulation tricks again; however, unlike in the past when oil supplies could be increased at will by domestic or foreign suppliers, their attempts to fake strength in the dollar by punishing gold has instead shifted wealth to oil and food. The Fed is powerless to prevent oil prices from rising as peak production arrives and the more they destroy gold as an alternative to dollars the more they inflate the price of oil and endanger the American economy.

If this scenario is true, the best way to calm the energy markets is to allow gold to appreciate significantly, opening the flood gates for nervous speculators to abandon oil in favor of precious metals. Or at the very least, spread the speculation around a little more thinly. The question is whether these old turds are wise enough to realize the destruction they are wreaking on global economies. I suspect the arrogance that Bernanke must enjoy to convince himself he has the ability to correctly manipulate interest rates and successfully guide a multi-trillion dollar economy will cause him great difficulty in adjusting his ideology.

The end result could be more volatility in the gold markets until Bernanke’s hands are forced by supply interruptions or foreign retaliation. I wouldn’t be surprised to wake up one morning and find Asians bid up the price of gold by $100 overnight. Ultimately this is likely a battle Bernanke can’t win, the only question is how high must oil rise before he concedes.