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Eye on Washington: Oil and Food Price Manipulation

Eye on Washington: Oil and Food Price Manipulation

Nothing stirs politicians into action more than a loss in public confidence…especially with an election coming.  Currently, food and fuel inflation is contributing to disenchantment. The fact that policies the politicians themselves have brought about are responsible for the inflation is lost on them. In response to sinking poll numbers they go into scramble mode, looking for political quick fix buttons they can press.  The problem is that quick fixes often work in the short run, but create problems in the long run; in this case, more inflation. It’s a shame, but the system operates by applying political quick fixes that serve self-interest but not the greater good. 

In the 1970s, U.S. and European governments engaged in multiple sales of government-held gold.  They sold a great deal of gold between $200 and $300 dollars an ounce. Between 1999 and 2002 Gordon Brown, then the U.K. finance minister, liquidated about 60 percent of the British gold reserves for about $275 per ounce.

How smart do these sales look now?  And how smart will current manipulations look later?

Washington is now selling national strategic stockpiles of oil at $90 per barrel to bring down the price of gasoline. We expect oil to rise eventually to $150 per barrel as a result of the continuing battle over control of the massive reserves present in Middle East oil-producing countries.

Outside Hands Stirring the Middle East Cauldron

For many nations, whether they want to maintain their standard of living (the developed world) or feed their growth (China, India, among others), the Middle East reserves represent an irreplaceable source of sustenance.  Thus, it is no wonder why we see growing evidence of significant foreign machinations and manipulation of local political groups as a backdrop to political unrest and upheaval in the Middle East.

What’s to come of this?  For one thing, we expect expanded military action in Libya, namely the U.S. and Europe committing ground troops.  The purpose is to restore the flow of that North African country’s light, sweet, easy-to-refine crude oil and bring the price of oil down before the 2012 election. Our guess is that they will try to get Libyan dictator Qaddafi out by the end of this year and have the oil flowing again by September 2012 so that gasoline prices will be lower by election day in November.

Our wise friend Larry Jeddeloh of The Institutional Strategist foresees a war between Iran and Saudi Arabia for control of Saudi Arabia’s oil fields and with major countries backing one or the other parties. The west and NATO will surely support the Saudis while Russia will back the Iranians. It is too early to be sure where China will stand.

The Guild Basic Needs IndexTM —Why it exists

In a recent newsletter we introduced the Guild Basic Needs IndexTM as an important touchstone for Americans who wish to keep track of how the prices of goods they require for daily life are changing. As we stated, the power of the index is its simplicity and focus. Moreover, it is tamper-proof. That makes it unique and reliable compared to the often-cited U.S. Consumer Price Index, which, like other indices of consumer and wholesale prices, can be seasonally adjusted or altered by the inclusion or exclusion of index elements. 

Such tampering is typical of governments, not just in the U.S., and it is inspired by strong incentives to understate cost-of-living increases.  Those incentives include the following:

*  To lull the masses and avoid criticism from constituents.

*  To keep pension and public assistance payments down. In many countries payments to retirees and to those on public assistance are calibrated to inflation.  Payments rise with inflation. In order to keep government spending down, many countries manipulate the statistical basis of price indices to understate inflation. In many fields, conflict of interest requires disclosure. Not here, it seems.  Governments are masters in the art of spinning reality and masking conflict of interest.

Along these very lines, a recent Dow Jones article revealed that Congress is discussing changes to the CPI index that would understate inflation and save money by minimizing payout increases to those with income pegged to the CPI. Check out the link to the article for yourself and decide whether this is manipulative and reeks of conflict of interest.
 
http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201106211841dowjonesdjonline000414&title=change-to-inflation-measurement-on-table-as-part-of-budget-talksaides

Our belief is that for individuals with a strong desire to maintain the buying power of their assets, reliable index like the Guild Basic Needs IndexTM offers great value. Let the politicians do their customary manipulations.  Our readers will have the correct information; the Guild Basic NeedsTM index shows a strong inflationary trend exists today in the basic needs of food, clothing, shelter, and energy. 


The Rising Value of Chinese Exports

We have been saying for some time that the developing world (which has been a source of lower prices for manufactured goods) is now exporting higher-priced products abroad and contributing to inflation. A recent Wall Street article and video discusses just that: how higher wages and higher commodity costs are resulting in the end of low cost goods from China. Here’s the link: http://blogs.wsj.com/chinarealtime/2011/06/21/asia-today-the-end-of-low-cost-chinese-goods/


Our Recommendations

We are making some changes to our recommendations.  We recommend that investors can repurchase Malaysian equities as their market looks poised to move higher after its recent pause.  U.S. equities also look like they are set for a rally that could last four to six weeks, so we recommend them for a trade.  We also remain committed to our bullish recommendations on Japan and India.   

Gold and Oil continue to act stunningly well in the face of higher margin requirements on commodities and other governmental attempts to get them to fall in price.  Investors should continue to be long gold, oil, and corn in the commodity arena. 

We are taking profits in our Australian dollars as the Reserve Bank of Australia may be done raising interest rates for the time being.  However, we still recommend currencies with strong economic fundamentals like the Singapore dollar, Canadian dollar, Swiss franc, Brazilian Real, and the Chinese Yuan.  All of these are much better options than holding a lot of U.S. dollars, Euros, or yen.

Please see our recommendation table below, and stay tuned to our upcoming letters for new recommendations.

 

  Date  Date Appreciation/Depreciation
Investment Recommended Closed in U.S. Dollars
Commodity Market Recommendation      
Corn 4/20/2011 Open -6.0%
Gold 6/25/2002 Open +365.1%
Oil 2/11/2009 Open +164.5%
Corn 12/31/2008 3/3/2011 +81.0%
Soybeans 12/31/2008 3/3/2011 +44.1%
Wheat 12/31/2008  3/3/2011  +35.0% 
Currency
Recommendation
     
Short       
Japanese Yen 4/6/2011 Open -5.7%
Long       
Brazilian Real 9/13/2010 Open +9.2%
Long       
Canadian Dollar 9/13/2010 Open +6.0%
Long       
Chinese Yuan 9/13/2010 Open +4.4%
Long       
Singapore Dollar 9/13/2010 Open +8.4%
Long       
Swiss Franc 9/13/2010 Open +20.8%
Long       
Australian Dollar 9/13/2010 6/29/2011 +14.1%
Long       
Thai Baht 9/13/2010 6/22/2011 +6.5%
Short       
Japanese Yen 9/14/2010 10/20/2010 -3.3%
Equity Market
Recommendation
     
Malaysia (NEW) 6/29/2011 Open  
U.S. (NEW) 6/29/2011 Open  
India 4/6/2011 Open -6.2%
Japan 2/15/2011 Open -8.8%
Australia 2/15/2011 6/22/2011 -0.9%
Canada 3/24/2011 6/22/2011 -7.1%
Colombia 9/13/2010 6/22/2011 +2.6%
Malaysia 4/6/2011 6/22/2011 +0.8%
Canada 12/16/2010 3/11/2011 +7.9%
U.S. 9/9/2010 3/11/2011 +18.1%
South Korea 1/6/2011 3/3/2011 -2.9%
Colombia 9/13/2010 2/2/2011 +3.9%
China 9/13/2010 1/27/2011 +5.0%
India 9/13/2010 1/6/2011 +7.9%
Chile 9/13/2010 12/16/2010 +8.9%
Indonesia 9/13/2010 12/16/2010 +9.5%
Malaysia 9/13/2010 12/16/2010 +1.3%
Peru 9/13/2010 12/16/2010 +32.2%
Singapore 9/13/2010 12/16/2010 +4.8%
Thailand 9/13/2010 12/16/2010 +11.9%
       
Bond Market
Recommendation
     
       
30 YR Long Term      
U.S. Treasury Bond   8/27/2010 10/20/2010 0.0%