Posted 5/4/2011

HOW BERNANKE BOOSTS GASOLINE PRICES

Whenever gasoline prices go up, there's always someone to blame.

Big greedy oil companies. The rich Arab sheiks. The speculators.

But this time it's different.

Although oil companies are greedy, and the sheiks are still rich, and the speculators are still hyper active, there's a new villain in town. His name is Ben Bernanke and he's the Chairman of the Federal Reserve. He's the man who has fired a double-barreled shotgun at the dollar.

Barrel one: He's been driving up the price of gasoline with his "quantitative easing" and "QE2" policies, which print dollars faster than consumers and businesses can soak them up. As the volume of dollars goes up, the value of the dollar goes down. (It's just simple Economics 101, supply-and-demand economics.)

Barrel two: He further forces the dollar down by keeping interest rates so low that international investors like China are beginning to shy away from the dollar.

As the value of the dollar drops, people look for other forms of currency – especially hard currencies like gold and silver.

In the past, gold and silver were sufficient hedges against the decline of any currency – dollar, euro, yuan or yen. But now the world is drowning in so many dollars that gold and silver are no longer sufficient to act as world currencies alone. That's where oil comes in.

Oil has become a new world currency, right up there alongside gold and silver. In fact, oil is now referred to as "the black gold."

Investors who want to protect themselves against the fall of the dollar have long since moved to gold and silver. But those who want more diversification have glommed onto oil.

As a result, a huge wave of oil investors have pushed the price of oil far beyond what it would normally cost based on the law of commodity-oriented supply and demand.

There is no shortage of oil, according to the Saudi sheiks who stand willing to increase their output to cover any supply shortage.

But there is no supply shortage. There is plenty of oil available to satisfy current demand.

The price of oil is now being driven upward by an incredible demand for oil as a currency. Why put falling dollars in the bank for zero percent interest when you can buy oil stocks, ETFs and futures?

If you buy $100 worth of oil, you keep ahead of inflation.

If you buy $100 worth of bank CDs, you fall behind inflation.

If you've already bought gold and silver, you will feel more comfortable adding oil to your bucket of currencies.

What's next?

Have you ever heard of Palladium? It's moving toward currency status too.

And with the world's middle-class population growing like weeds, food commodities like corn, soybeans and wheat may assume currency status as well. If you doubt this, just look at the recent run-up of grain prices – and farmland prices.

As the dollar falls, people will move to hard currencies to protect their nest eggs from being ravaged by inflation, which always follows any paper currency's decline.

But be warned, the new hard currencies remain part commodity, which means they will be subject to greater volatility than many savers and investors will be comfortable with.

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