You’d think the only reason gold ever went up is oil.

Several big shooters put out the word on “bubble television” yesterday that they are doubtful gold will make it through the $950 handle before September. The consensus is that oil is peaking out and the dollar is bottoming out. And that the gold market will go to sleep as usual during the summer months.

That news is old. Heck, the oil and dollar conundrum has been a personal worry of mine for over a year. And it’s rare to see such a well-broadcast downturn. Since gold prices peaked in March on these as well as a few other inconsequential worries (such as the bearish roars from the IMF about selling its gold), oil prices have leapt 30%. Gold bulls were worried they would fall 30%.

A 30% correction now would leave oil right about where it was in February.

Oil has been proving the consensus wrong since 2001. Even just five quarters ago, it was hovering in the $50s. No one was talking about $200. Most were already worried then that it was a “bubble.”

All this worrying has, no doubt, checked the upside in gold and created an early seasonal low.

Given the still largely overlooked inflationary fundamentals, I have to part with the consensus.

One insight we could draw from the oil experience is that it has gone beyond the wildest predictions of anyone I read or heard eight years back. If you had called $200, or even $130, back in 2000, you would have been fired. You would have been so far out on the fringe they’d have to make a new club for you.
The point is as with the Nasdaq tech bubble, the real estate bubble that followed and now the oil bubble (relative to gold), bull markets have a way of going higher than anybody expects.

The commodity bull market is not about economic growth or the finiteness of commodity stocks.

It is about money and inflation. It is about gold.

It is about the viability of a paper currency monetary and fractional reserve banking system.

When the market realizes this, the gold market will no longer obey the consensus. That is, it won’t trade so rationally. You won’t see the healthy corrections that you are seeing now.

The oil price is telling us what an important commodity can do when it is a darling in today’s market and monetary environment. It is telling us there is something wrong. It is drawing attention to the fundamental monetary questions of the day. Consumer price inflation in Europe is at a 16-year high, even with a strong currency! I see many reasons why the consensus is going to be wrong here. So with a strong Euro why is there inflation, vs a weak dollar and inflation? Because all currencies except the Swiss Franc is not backed by anything but a government with a printing press. The law of supply and demand. The larger the supply of money the higher prices go, thus inflation. If gold is the universal currency then the price of gold will go higher
Lets take ratios. Oils peak in the 70's was $34 and today the high in May was $136. So a 4 to one ratio.
What if gold did the same thing. Gold was $800 in 1980 so 2010 it could be $3200. No one is predicting that because it is insane right. Remeber gold goes higher due to the result of inflation. Oil is causing inflation. Therefore gold lags the price of oil. So don't be discouragwed by the dip in gold and silver. Especially the stocks that have been clobbered lately. Now is the time to buy more metal stocks.