Will We See $5 Gasoline in 2011?

Apparently, Goldman Sachs is predicting $5 gas this summer.  Goldman Sachs is also proclaiming that oil will hit $135.  Meanwhile, JP Morgan Chase is predicting oil at $130.

This should not come as a surprise and it should not come as a surprise if it actually happens.  With the way the adjusted monetary base looks over the passed few years, we are lucky we don't have $20 per gallon gas right now.  The only thing that has saved us is the huge increase in excess reserves held by commercial banks and the high demand for cash that typically comes with a struggling economy.

Although problems in the Middle East have certainly exacerbated the situation, the rise in oil prices is primarily a monetary phenomenon.  When the Fed creates new money out of thin air by buying assets (typically government bonds), this new money will raise prices as there is more money chasing the goods and services already in existence.  This new money does not spread out uniformly though.  It often goes into certain sectors, which is why we have bubbles.

I don't think highly of Goldman Sachs and JP Morgan Chase, mainly because of the elitist bankers tied to the government.  But just because I don't like the companies, it does not mean I would bet against them.  In fact, assuming they are not trying to mislead anyone on this subject, they probably know a lot more than you or I.  This puts the chances of $130 or $135 oil prices as a good possibility for this summer.

Until we see some reason that the Fed will pull back and execute its so-called exit strategy, I see more monetary inflation in the short-term and mid-term.  There may be a break after QE2, but we could easily see QE3 if the economy shows more signs of weakness.

You should continue to implement a strategy of safety and a strategy of hedging against inflation.  For safety, I recommend the permanent portfolio as described in Fail Safe Investing.  For hedging against inflation, I recommend hard assets that can't be made on a printing press and I recommend against U.S. dollars and U.S. bonds.  We should look for price inflation to rise and for Americans to feel more pain at the pump and in the grocery store.