Flammable Fund Follies

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Good Afternoon,

Crude oil's seemingly endless surge continued to fuel dollar selling and additional buying of gold during the midweek session. If ever there was an oil-dominated trading day, today was it as far as gold was concerned. Trading focus remains on just how far up the value scale crude oil can be pushed by speculators before either demand simply dries up or a global recession is triggered.

Gold is riding on oil's coattails, although it lacks the requisite internal fundamentals, as we saw in yesterday's World Gold Council Report. It is simply being dragged along at this stage. Long-range oil futures approached $140 per barrel as speculative funds continued to pour into the commodity. The effects of this were seen across a wide range of assets, but probably none more so than the dollar, which lost another .39 to come very near the 72.05 mark on the index. Stock markets are now falling in the wake of this oil tsunami (the Nikkei picked up on yesterday's 200 point drop in the Dow and fell 233 points, while today's Dow shed another 200 points).

New York bullion reached a high of $931 as oil continued to smash through price level after price level. The explosion in oil prices is threatening to derail the Fed's plan to put a floor under the dollar and could effectively delay the timing of rate hikes as the economy takes the punch. The inflationary effects of same present the other challenge to the Fed at this point. Silver showed a 30 cent gain at $17.96 and platinum rose $44 to $2193 today. Palladium also climbed, adding $10 to $457 per ounce. In our opinion it remains the single metal in the complex with the best outlook and likely the only one that shows true potential for doubling its value. However, much still depends on how the bigger picture unfolds. The credit crunch-induced recession may prove to be a whole lot shallower than the one that the current oil price trend might give rise to.

The last rate cut came awfully close to being the rate cut that wasn't (see my article from April 30). Now we learn that some of the language was quite mild compared to what went on behind closed doors. Marketwatch just reported (10 minutes ago) on the Fed meeting notes. What did we learn?

" There was a lack of desire expressed at the Federal Reserve policy meeting for additional rate cuts in June or beyond, especially in light of the inflation outlook, according to an official summary of the meeting released Wednesday. Even more signs of weakness would not be a reason for addition cuts, the minutes said.

"Several members noted that it was unlikely to ease policy in response to information that the economy was slowing further," according to the summary. Fed officials did vote to cut rates at quarter-point at the April 29-30 meeting, but that was viewed as a "close call."

FOMC members were clearly worried about the inflation outlook. Their forecast for headline inflation as measured by the personal consumption index jumped to a range of 3.1 to 3.4%, much higher than their previous forecast of a 2.1 to 2.4% rise. The risk of higher inflation was just about even with the risks of an economic downturn, members said. Fears of an economic meltdown from a credit crunch had lessened, members added."

Well, they can worry a whole lot more about inflation, now that crude oil reached $132.69 this morning. The US interstates might look deserted come Monday. The debate continues as to whether the spike is to blame on fundamentals or on speculation. Forbes.com reports:

"Although supply worries have contributed to the recent leap in oil prices, Global Insight analyst Simon Wardell said this latest milestone was due more to speculation than any shift on the ground. "It looks like the short-term balance is fine, and is probably likely to improve," he said, adding that Organization for Petroleum Exporting Countries' (OPEC) output this month was expected to rise by 700,000 barrels per day.