Hold On Tight!: Oil, Gold and Grain Benefit From Uncertain Economic Times
Is the world going crazy? I know, most of you would say it went crazy a long time ago. In fact one of my favourite editors would say its gone crazy ever since the 1960′s ended. However, with $109/barrel oil and an American greenback in free fall, it would seem there are no shortage of crazy predictors in this world. Add me to that chorus.
Trying to explain what’s going on is like taking another turn on Phil’s dartboard. With oil at such lofty levels, everybody is being caught in this North American collective move to grab your wallet. Gas prices are going through the roof.
Much of this nobody has ever thought about before. I know, some of you don’t think about it as much as I do and I’m sure many of you disagree with my synopsis. So let me tell you a story. In my other career as an agricultural economist/farmer I’m often asked to explain some of this economic craziness at public events. This past week was no different as I made three public appearances for the Dupont Corporation at the Western Fair Farm show in London Ontario.
You know the rest of the story. I was talking about biofuel, grain markets and the value of the loonie and the American greenback and how that is all working together. Agricultural markets have been nuts over the last few months and farmers were starry eyed as they looked at many of my charts and illustrations.
One of my lines was “nobody ever expected oil to be over $100, the US greenback at all time lows, the Canadian loonie at par and grain prices at levels never dreamt at before. My point was all our old assumptions have gone out the window. Nobody ever thought we’d be in this position going forward and of course nobody knows where we are going now. There will be economic fall out. Looking into my crystal ball is almost as good as the high priced economists.
The crux of this whole economic phenomena is the softening US economy. It’s not a meltdown. However, it’s more like cheese on a warm plate, which is softening with a frantic cook called the US Federal Reserve trying to lower the temperature. The only problem is the cheese has softened and won’t easily return to its solid form. The result is a lower greenback, making everything else unstable, which is priced in US dollar. The US Federal Reserve is set to lower interest rates again. The cheese is looking to get softer.
It’s getting softer because lowering interest rates is fuel for a weaker dollar. It also means “money is cheap” almost to the levels where American banks and mortgage companies with their foreign bank suitors lent money like drunken sailors which created the sub-prime mortgage mess. In economic terms that’s called economic stimulus where more and more money flows through the economy creating price inflation. Add $109 oil to the mix and you’ve got an explosive brew never seen before.
Global money is flowing wherever it can find a home to keep or increase its value. That means gold, oil and other commodities, which have potential in becoming its new home. The grain complex has exploded partly because of new biofuel demand but also because commodity and hedge funds have molded together bringing some of these huge pools of capital into the market. Ditto for oil, gold and any other commodity, which shows growth potential.
This whole thing has cost you money and will probably continue to go forward. For instance, you all know how much more gas is costing you. In Canada we are closing in on $5/gallon for gas. In the US consumer may reach $4/gallon. Also food inflation is taking its toll. I don’t have much sympathy for Canadian consumers because you can afford it. However most of our world is poor with people existing only to feed themselves the next day. They are the real victims of this new economic reality.
In Canada we’re fortunate to have Alberta because as the price of oil goes up, our country gets richer. Our currency stays strong, probably much, much stronger than most of us would like. However, what’s good about this is that our federal debt continues to go down, our inflation numbers are still good and the Bank of Canada may still lower interest rates ahead. Still for some within our Canadian economy like farmers and manufacturer the future will be a challenge.
That’s because our American friends with their economic problems are making their lives challenging. It’s not all bad; in fact there is a lot of good too. However, what happens next week, oil at $119/barrel? In these current economic times, I wouldn’t want to bet against it.