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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary. Each article or essay is selected on the basis of its long-term relevance for understanding the role gold plays in the individual's portfolio, the overall political economy, or both.
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The Fifth Horseman
by Michael J. Kosares
Editor's Note: The Fifth Horseman is the lead article for April's News & Views: Forecasts, Commentary & Analysis on the Economy and Precious Metals. If you not already on our newsletter list and would like to receive the full newsletter, please click on the "Request Info" link above.
The New Four Horsemen of the Apocalypse (Y2K, the Asian Contagion, the Over-valued Stock Market, and Euro Introduction) are about to welcome a fifth member to their menacing quartet -- Rising Oil Prices. This Fifth Horseman could very well be the most intimidating of them all. Those of us who are old enough to remember the inflationary 1970s--the gas lines, the double-digit inflation rates, price controls, 20% prime lending rates--will not be pleased with this new visage galloping headlong over the hill.
Oil is a component in the pricing of just about everything because oil plays a role in the production of just about everything. And as shown in Chart 1, there is a direct correlation between rising oil prices and rising inflation rates. And the corollary to rising inflation rates, as we now know, is rising interest rates. Following this thumbnail sketch a step further, the corollary to rising interest rates is falling stock and bond markets.
What makes the current situation more dangerous than the 1970s, as shown in Chart 2, is that during the 1970s the United States imported roughly 20% of its oil. We now import nearly 60%! Once the inflationary pressures kick in, they will be difficult to relieve.
The driving force behind oil prices is a recent agreement among oil producers signed in Vienna last month. OPEC ministers agreed to reduce daily oil production by 2.1 million barrels per day--a significant cut back. In a sixty day period ramping up to the Vienna agreement, oil prices rose from just under $10 to well over $15 per barrel. The oil ministers would like to push oil over the $18 area and keep it there.
The new OPEC group led by Saudi Arabia and including most of the top producing countries got a shot in the arm when Russia pledged to cut its production by 100,000 barrels. The atmosphere hanging over this OPEC agreement was much thicker than over previous agreements. Unlike the 1970s when the cartel was concerned about upping profits, in this go around the issue has become financial survival -- a very strong incentive to become serious about oil prices. Many of these countries are literally on the verge of bankruptcy, currency devaluation and economic failure. Much is at stake. And many who follow the politics of oil think that there is enough at stake to keep the cheating among participants to a minimum. These same analysts think that we could feel the inflationary pinch as early as this fall and by early next year at the latest. Rising Oil -- this Fifth Horseman of the Apocalypse--is beginning to crop up in conversations about gold ownership along with the other Four Horsemen already mentioned.
We have expanded this issue of News & Views to twelve pages in order to make room for the new Gilded Opinion section and the new USAGOLD Nuggets section. I think you are going to enjoy and learn from both of these additions and we welcome your feedback. March was an extremely interesting month for gold and one of the biggest volume months in Centennial Precious Metals' history. We want to thank all of our clientele for their loyalty, friendship, and business. Loyalty begets loyalty. This expanded edition of News & Views is your reward. Find a quiet place, sit back, read and enjoy.
Copyright 1999 USAGOLD / Centennial Precious Metals, Inc. All Rights Reserved. No further reproduction without permission.
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