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The Daily Reckoning | Saturday, September 29, 2012 Chris Mayer on the Battle of the Commodities: Oil vs. Gold, Readers weigh-in on food stamps and counter conspiracies, Plus, all this week’s reckonings archived for your balanced intellectual diet... ------------------------------------------------------- QE3 is a drop in the pond compared to this... QE3 may not be doing much to get America’s economy going, but THIS sure as heck could... Some market analysts believe it could ignite more economic growth than electricity or the Internet. And — beginning October 28 — it could make some Americans the kind of money most folks only dream of.  Click here now to find out how. Joel Bowman, checking in today from Buenos Aires, Argentina... Joel Bowman We like gold. And we like black gold. Both serve a purpose. Both serve us. Without the former, we’d be left at the mercy of inflationist lunacy from the Fed. Without the latter, we’d be left at the mercy of mother nature. One stands guard against the unnatural forces of man. The other helps us overcome natural forces of our surroundings. That said, the price of these two very valuable commodities is never perfect. No price is...at least not beyond the moment. Far from static, the price indicator is forever searching, always trying to express the changing desires of man. First, it overshoots to the upside...then overcompensates to the downside. So what’s the word with the price of oil and gold? Do the dollar amounts next to a gram and a barrel fairly reflect how we value them in this moment? Or is there some wiggle room? Chris Mayer takes a look at the two commodities in this week’s feature essay, below. Please enjoy... [The following column was first published in these pages on Thursday, September 27, 2012] The Daily Reckoning Presents Buy Gold, Sell Oil Chris Mayer Yeah, yeah, I know...gold and oil are both hard assets, but that doesn’t mean they will both provide a reliable hedge against the inflationary trend Ben Bernanke is creating. In short, I like gold much better than oil...at least for the next couple of years. The best reason to own gold is also the most well-known reason. The US government prints a lot of money, as the nearby chart plainly shows. In round numbers, the Fed conjures about 55 million fresh dollars into existence every hour. By contrast, the entire world’s gold mines only manage to extract about $15 million worth of gold from the earth every hour and US mines only extract $2 million worth of gold per hour. In other words, Ben Bernanke creates US “money” about 27 times faster than US gold mines. Wild stuff. It is hard to fathom a readjustment of gold to keep up with the amount of money created. But that readjustment seems inevitable.  Obviously, inevitable is not the same thing as imminent. But there is good reason to think the gold price will top $2,000 fairly soon. The Deutsche Bank report shows how the gold price has pretty much marched in step with the Federal Reserve Bank’s money printing since 2000.  Based on all this kind of statistical analysis, even the mainstream Deutsche Bank predicts gold will top $2,000 in the first half of 2013. The obvious take-away is to own some gold. Second, look at gold stocks — which have lagged the metal for some time and seem to be showing some life finally. The GDXJ, which is an exchange-traded fund made up of small gold stocks, is up over 25% since early May. It remains a good way to play a gold stock rally if you don’t want to take on the risks and frustrations of owning individual gold stocks.  If You Own Any of These Gold or Silver Stocks*... Then you may be eligible to instantly collect a cash payment of $784, $1,324, or $2,345 — without having to sell your shares. (*List also includes technology stocks, retail stocks, and more. For a complete list of all 3,097 participating stocks, see this report.) Meanwhile, the outlook for the price of crude oil seems much less upbeat. In fact, I think the price of crude is likely to tank over the next couple of years. I have said before that I think the oil bull market is on its last legs. In this, I’m just playing the odds. History and economics dictate what those odds look like.  For example, we know stock markets don’t trade for 30 times earnings — as the US stock market did in 2000 — for long. That was a figure far above the long-term average for stocks. And stocks subsequently crashed.  We know housing prices can’t sustain a price of 32 times the cost to rent them — as they did when housing prices peaked in 2006. That was again far above the long-term average of just 20 times. Housing prices later crashed. Similarly, we can conclude that the current oil price — which is currently 230% above its long-term inflation-adjusted price — won’t last either.  The current bull market began in 1998. The average oil price in 1998 was just $11 per barrel. So the current bull market is 14 years old. And the US oil price is nearly nine times what it was in 1998. It’s been a great run.  Just how great you can see by looking at the previous chart. Crude oil is 230% above its long-term average in inflation-adjusted terms. Besides, it is not as if we can’t see what will slay the oil price. There are many sharp swords all over the place. Let us consider demand. The biggest economies on the earth — the United States, Japan, China and the EU — are all slowing down or contracting.  Let us consider supply. New technology continues to unveil giant sources of supply once thought uneconomic. David Fingold, a portfolio manager at DundeeWealth, writes: More oil? It turns out that on top of US oil shale, Alberta oil sands, West Africa and Brazil there’s yet another massive source of oil that may be coming to market. It’s called the Bazhenov Shale, it’s in Russia and it’s big. I’m no geologist, but I’ve been told it’s similar to the Cardium in Alberta. Exxon starts drilling there next year. The energy boom of the 1970s ended when the North Sea and Alaska North Slope came on line at the same time. It seems likely more than two major fields will hit the market this decade. It’s hard to see oil becoming relatively scarce anytime soon. The Bazhenov shale could be another game-changer for the oil industry. It is yet another massive oil source to add to a list that keeps getting longer as new technology cracks open sources once thought unreachable. People will come up with all kinds of reasons to discount the new oil supplies. But history shows that human beings are creative and tenacious.  I was among the early investors in the Bakken in 2008. I recommended Kodiak Oil to the subscribers of Mayer’s Special Situations. The stock subsequently doubled. Back then, I remember hearing some geologists scoff at the Bakken and its potential to produce significant amounts of oil at low costs. Yet, here we are. Even now, I think people still underestimate the amount of oil the United States could produce. On oil, I must disagree with my friend Byron King, who writes Outstanding Investmentsand (in a revision to his older “Peak Oil” views) now says we’re at “peak cheap oil,” or the end of cheap oil. I could not disagree more. So one thing is certain; one of us is correct. I say it is also a certainty that oil will be cheap again. And then it will get expensive again. Then, cheap again. And so on. In other words, just like any other commodity, it will continue to boom and bust and go through cycles. Timing is the great uncertainty.  I am interested in putting my money in areas where the odds favor me. Increasingly, I don’t see the odds favoring me when it comes to oil prices. To me, oil is much like stocks in 2000 or housing in 2006. It’s overpriced and due for a sizeable selloff. Regards, Chris Mayer for The Daily Reckoning Editor’s Note: Chris always seems to have his finger on the pulse of the world’s up-and-coming commodity stories. From getting in early on the Bakken, to checking out potential plays in remote regions around the globe, his boots-on-ground research consistently makes serious gains for his loyal, perennially well-informed subscribers.  And right now, he’s got an incredible report that says US oil reserves couldquadruple thanks to a little-known technique being hailed as a “magic drug” in the industry. Click here now to check it out, and start grabbing some of the finest analysis you’re likely to find, from one of the most respected names in the business.  ALSO THIS WEEK in The Daily Reckoning... In Stamps We Trust: Paving the Road to Prosperity with Food Stamps By Eric Fry  Rancho Santana, Nicaragua The FNS calls the economic benefit of its activities the “multiplier effect.” We call it the “broken window fallacy.” Fixing a broken window generates “economic activity.” But that doesn’t mean breaking windows produces prosperity. Likewise, feeding the poor creates economic activity, but that doesn’t mean increasing the number of people who receive food stamps produces prosperity. Sushi-Grade Crises By Joel Bowman  Buenos Aires, Argentina A dear friend sent us a message. “Comedy” was the title and, attached, was a cameraphone snapshot depicting, as our unpaid correspondent described it, “3-4 planeloads of people queuing to get through 2 scanners at customs at Ezeiza [Airport, Buenos Aires] while the 4 remaining scanners were conspicuously closed.” This is typical of government operations in late-stage, degenerate socialist countries, like Argentina. What happened next is also typical...and instructive. Your Liberty and Your Money By Dan Denning  Melbourne, Australia We begin with a cynical thought experiment. It’s really a conclusion about what’s going on in the financial markets. And the conclusion is this: the value of financial assets and currencies is being deliberately crashed in order to transfer wealth from the public to a small group of global elites. Sounds crazy, right? Maybe even cranky? We’ll get to that shortly. But first... Think, Bernanke by Douglas French Auburn, Alabama Why a third round of quantitative easing? Sure, Ben Bernanke says that it is all about jobs and growth, as shown by various 60-year theories pushed by Lord Keynes. Really? Let’s get serious. This approach has done nothing over five years. It has prolonged the suffering. Another round virtually guarantees continued economic stagnation. QE is poison for the future of American prosperity. What to Expect in 2013... Between 2004-2007, Bill Bonner and Addison Wiggin did their best to alert their loyal readers to the dangers of the housing bubble well before the mainstream said anything about it. Well, today, they see something even worse looming just over the horizon. It’s not often our Reckoner-in-Chief agrees to appear on-screen, but this was just too important. Click here (or the image below) to see what they’re talking about now... The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors... First up, reckoner Bruno furnishes a thoughtful response to Dan Denning’s article on Liberty and Money... Whatever the central bankers, bankers and politicians are actually up to with the economy has probably little to do with conspiracy and a lot to do with incompetence. In order to conspire, say, to deprive the middle class from its wealth, or to create a worlwide single currency, the conspirators would need to be motivated by some ideology, or by faith. It is a requirement for any conspiracy. Yet, nowadays, our rulers are blind with greed, not with faith, they are led by their most basic instincts, and they are unable to think clearly, even less to conspire. People like Jamie Dimon and Lloyd Blankfein probably dislike each other, they are more interested in what the other is earning, or stealing, than in cooperating. As far as they are concerned, central bankers are merely doing what Goldman Sachs and other banks are “suggesting” them to do. And politicians are only worried about their next campaign, and how to finance it. What they all have in common is that they are focused on themselves and are only interested in the ultra-short term (one year is like eternity to them). Conspiring would, on the contrary, require a lot of long term thinking, patience, and cooperation. It may be that the greed and incompetence of our leaders will lead to changes such as those suggested by Dan Denning, but it will be the result of randomness, not of some elaborate strategy. No grand scheme brought Hitler to power, it is just that circumstances, resulting from the incompetence of others, laid the ground for something like that to happen. Likewise, incompetent European technocrats are actually laying the ground for major troubles to come...we just don’t know yet who will be here to seize the opportunities that will arise from the ensuing chaos. And here’s another reckoner, also named Dan, writing from Lockport, NY, in response to Eric’s food stamp article... Just a thought, have you noticed the government’s new school food program? Limiting calories, and deciding what is healthy for the kids and what isn’t. Don’t be surprised if the government does the same for the food stamp program, get as many Americans involved in the program as they can and then tell them how to eat. After all, isn’t this a nanny state. And finally, Reckoner B. Gale writes in response to the same article... Apparently you people just don’t get it. We are on the way to prosperity. If more people will stop working and apply for SNAP benefits we will have incredible economic growth and will eventually pay off our debt and live happily ever after. As for the people who don’t want SNAP and want to work but can’t find a job we just need to follow good old J. M. Keynes. Put money in a whole bunch of bottles. Put the bottles deep in the ground and pay those unemployed to dig up the bottles. We are so lucky to be in a country with so many people working to make life better for us. Gosh. --- Feel free to email any thoughts you have on the matter to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning