Deflation is Here

The interim bear market in gold and other precious metals that I've been tracking for you isn't the only bear market out there. As I warned quite some time ago, the price of crude oil would also fall substantially, down to below $70 a barrel, and quite possibly lower, before it bottoms.

 

Since June 19, oil has plunged from $107.44 a barrel to $67.22 as I pen this column, a $40.22 hit, an amazing plunge of more than 37 percent!

 

More losses are coming for oil. In fact, take a look at this monthly chart of oil that I showed you at the end of last year, and notice how spot on my forecast has been.

 

Oil is now hovering just above that first major support level. Once it cracks that, oil will plunge to as low as $40.

 

That leg down to $40 could begin any moment, or perhaps after a short-term rally.

 

The crash in oil prices is hard to believe, when there are so many diehard oil bulls out there. Even more so when you consider all the political hot spots around the world that are now causing so much turmoil.

 

But from a fundamental point of view, oil is not bullish. Global oil inventories are fine now; there is no squeeze in supplies.

 

Moreover, as we all know, the U.S. now has more energy of its own than it's ever had.

 

So what is driving oil prices lower? The answer, in my opinion, is simple.  And no, it's not some far-fetched market manipulation to bring down Putin and Russia.  Oil prices are tumbling now, and the fall will continue. But it won't last forever.

 

What's driving oil lower is the same thing that is driving nearly all commodities lower. It's called deflation. That's especially true for Europe. The euro region is in a freefall.  Almost every country in Europe is contracting, severely. Unemployment remains sky high, threatening to move even higher.

And all across the globe, rising geo-political tensions and conflict are driving most business people and investors to play it safe, park money in cash, take risk off the table, and hoard and protect their capital and wealth.

 

The terrifying truth Washington won't tell you

 

America's economy is on the road to ruin. The actions you take now – before this house of cards collapses around us – will determine how well you and your family will weather the coming financial cataclysm … and also how rich you'll be for decades to come.

 

That too is deflationary, for all but the U.S. equity markets. So it's hardly surprising that oil — like gold, silver, copper and so many other commodities — is still in bear market territory. But mark my words: a new oil bull market will form from this decline.

 

How so, when deflation is so strong right now? When there are so many dynamic changes occurring in the oil market, with the U.S. set to become energy independent?

 

There are three reasons oil will soar again, after it bottoms (in 2015). First, there's China. While China is home to oodles of natural gas, its economy is still oil thirsty and will be for a very long time. 

 

In fact, in terms of dependence on oil, the U.S. and China are moving in opposite directions. While  the U.S. will soon be energy independent, China will soon be the #1 consumer of  oil and almost entirely dependent upon foreign supplies.

 

Second, there's incipient global inflation, and a coming end to the dollar reserve system. Europe will crash into a steep deflationary mode in 2015. But it won't last forever.

 

At some point in the not–too–distant  future, the euro will crash so much that inflation will reappear in Europe, and  even here, too.

 

In addition, the U.S. dollar will eventually lose its reserve currency role, and be supplanted by a new global reserve currency, in electronic form. The dollar's diminished global role and the uncertainty of a new monetary system and reserve currency is bound to be very bullish down the road for oil prices.

 

Third is the war cycles. Right now, they are bearish for oil, as they are for gold. But keep in mind that the cycles of war point consistently higher into the year 2020.

 

That means that rising geo–political tension around the globe is going to accelerate DRAMATICALLY in the months and years ahead, and at some point — also not too far off in the distant future — it IS going to put a firm bid under oil and energy prices.

 

The question now, though, is how can you play the downside in oil over the next few months, as oil heads toward a major bottom near the $40 level?

 

Simple: Buy shares in an inverse ETF. My favorite for oil is the ProShares UltraShort DJ–AIG Crude Oil, symbol SCO.

 

What about energy shares? With very few exceptions, most should trade lower along with oil over the next few months. Then they will become a fantastic buy.

 

Source: moneyandmarkets.com, Wednesday, December 10, 2014, Oil Plunge Has More to Go, by Larry Edelson

 

Comments

 

The US will continue to decline until we can bring back more design engineering and manufacturing to the US.  All the minimum wage jobs in hospitality won’t restore the middle class. It will assure our drift into poverty. Our best bet us to close the EPA and cease all other job killing federal actions.

 

Norb Leahy, Dunwoody GA Tea Party Leader