Consumer Food Prices Skyrocket, Oil At Another Record, How to Play Gold, Housing Still Can’t Find Bottom, and More!

by Addison Wiggin & Ian Mathias

  • CPI report shows slowing consumer inflation… if you don’t eat
  • Oil hits another high… Congress moves to stop filling American reserves
  • Chris Mayer on a hot M&A market…and his favorite ways to play it
  • Gold falls again… David Galland on how to handle the swings, and what to expect next
  • Jim Rogers on the next shoe to drop in the current credit crisis


U.S. food prices are inflating at their highest rate in 18 years. You’ve sensed it at the grocery and read of it here in The 5, but the government made it “official” this morning… food is getting expensive.

In its latest CPI report, the Labor Department admitted that consumer food prices rose 0.9% in April. That’s the biggest monthly gain since 1990.

But the headlines this morning tout the latest CPI reading as relatively benign. As a whole, the CPI gained 0.2% during April, in line with expectations and at annual rate of 3.9% — down a bit from March.

And if you believe that one, let us tell you another: Consumer “energy prices” were completely unchanged in April, claims the government report. In fact, the bean counters in Washington would have you believe gas prices fell 2%. We’re not sure where the Labor Department buys its energy, and the CPI is notorious for funky “seasonal averaging”… but c’mon. No change at all?

That looks like oil gained at least $10 in April, while gas prices (remember those 17 days of consecutive record highs?) shot up about 30 cents. Must be reading the chart wrong.

Oil struck another all-time high yesterday, a penny short of $127. Traders appeared cautious at the outset of trading… disasters in Myanmar and China had market makers fearing crude demand would momentarily decline.

But then came rumors from Iran. The Middle Eastern nation admitted it was considering cutting production… a great idea as oil hits new highs daily. Despite the total idiocy of an Iranian production cut, that was all it took for U.S. traders to bid oil to new highs.

“We are buying the most expensive crude oil in the history of the world and storing it,” said Sen. Byron Dorgan (D-N.D.) of the U.S.’ Strategic Petroleum Reserve. “When American consumers are burning at the stake by high energy prices, the government ought not be carrying the wood.”

Dorgan and the rest of Congress voted yesterday to stop filling the SPR. Now 97% full at 701 million barrels of crude, senators are asking President Bush to stop buying $127 barrels to fill the last 3%.

At present, the SPR is adding around 70,000 barrels a day. If completely full, the SPR would — in theory — keep the U.S. supplied for up to two months.

“Why isn’t the U.S. drilling for oil in places like the Arctic National Wildlife Refuge (ANWR) of Alaska?” asks Byron King. We suspect Byron knows the answer, but just can’t come to grips with the fact that the U.S. is denying itself 19 million acres of potentially oil-rich land.

“Many of the Prudhoe Bay geologic trends extend into ANWR, yet the place is off-limits to exploration and production for oil. There are realistic estimates that ANWR could hold another Prudhoe Bay-sized oil patch and produce as much oil per day as the state of Texas.

“The same technology that has been developed to exploit Prudhoe Bay over the past 40 years could also extract oil from ANWR, with minimal industrial footprint. Of the 19.2 million acres of ANWR, extensive oil development would use up about 2,000 acres. Almost all drilling would occur in wintertime, with equipment and supplies hauled in over ice roads that melt away in the spring. Drilling pads would be made of gravel. When the wells are played out in many years, the gravel can be dug out and hauled away.

“By comparison, drop a postage stamp on the area of a football field. The postage stamp will cover a larger percentage of the football field than oil development will affect ANWR. As for effects on the wildlife, the Prudhoe Bay development has demonstrated an entirely negligible consequence to the wildlife of the North Slope. Wild ducks nest next to drilling pads, as I can attest from firsthand knowledge. Been there, seen it.

“No, the U.S. cannot solve its economic and energy problems by ‘drilling our way out of it.’ But neither can we solve our problems by NOT DRILLING where there is a strong likelihood of finding more oil.”

Gas in the U.S. hit another record high yesterday. The national average price is now $3.75. Gasoline has set a record high for eight straight days.

“M&A activity has been hot in renewable energy,” Chris Mayer tells us. If you didn’t know, Chris was a corporate banker before joining Agora Financial… the world of mergers and acquisitions is the backbone of his investment strategy.

“Last year, deals totaled $55 billion, an increase of 47%. And what are the prices in these transactions? Short answer: very, very rich.

“For example, Suez recently bought a half interest in a French wind generator company that put the value of the company at 50 times sales. That’s sales, not earnings — 50 times sales! Wow. That’s a market in nosebleed territory.

“Everybody loves renewable energy. It’s pretty clear that renewable energy will play a bigger role in the world’s future energy supply than in that of the past. And that’s leading to a frenzied market in buyers looking to pick up renewable assets and technology.

“I believe in the long-term future of renewable energy such as wind and solar power. But as an investor and speculator, there are fabulous opportunities in good old-fashioned oil and gas.”

Chris’ Special Situations readers own plays in the Bakken and other regions, including, most recently, the Lower Huron and Cleveland shales in Appalachia. Starting today, we’re offering you a special chance to join Mayer’s Special Situations at a heavy discount. Readers of The 5 will get the first crack… keep an eye on your inbox.

After a brief rally last week, gold is back in the dumps. Spot prices fell off a cliff yesterday morning on dollar strength and trade today around $865.

“The current correction is not yet exceptional,” writes David Galland of Casey Research. “Since the current bull market began in earnest in 2001, there have been nine corrections in excess of 8%. During the three worst pullbacks, gold fell 15.98%, 18.27% and 27.7%, respectively. And the average of those corrections is 13.6%, so the latest, which touched 18% at its worst, is only marginally worse than average.

“Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

“And if it does, rest assured that just as they did when gold moved down by that percentage in May of 2006 — falling from $725 to $567 — analysts will line up to say that the back of the gold bull has been broken. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have missed a rebound of close to 100%.

“The bottom line is that if you are going to invest in the resource sector, you need to take a long view. And I would stress once again you have to be invested with money that you can afford to lose a substantial portion of and not be overly concerned. Otherwise, you’ll invariably become shellshocked during periods of volatility and be prone to breaking ranks and selling at the worst possible time.”

Sound advice from David, as usual. Get more from him and his partner in crime, Doug Casey, here.

The dollar grew a bit stronger yesterday. The dollar index inched up to 73.3, while the tangible value of most major currencies stayed the same. The euro goes for $1.54 this morning, the yen 103 and the pound — the night’s biggest loser — is back to $1.94

Stocks were a bit of a yawn Tuesday. Most major indexes remained unchanged.

U.S. foreclosure filings increased in April to 243,353… 65% higher than this time last year. Filings increased 4% from March, reports Realtytrac, and now stand at the highest level since Realtytrac started keeping records.

And as more foreclosed homes enter the market, home prices are crashing. The national average home price fell 7.7% year over year during in the first quarter… the worst quarter since the National Association of Realtors began keeping track. (Notice a trend?)

Home prices fell 4.8% during the first quarter compared with the last three months of 2007. The median sales price is down to $196,300. That’s down around 20,000 bucks from last year’s median.

Bank of America — the U.S.’s biggest consumer bank — announced this morning that losses on home equity loans would be ever greater than the bank had previously predicted. So far, BoA says 2.5% of its $118 billion mortgage portfolio could be lost. Look for this number to be revised… again.

“Conditions in financial markets are still far from normal,” cautioned Ben Bernanke yesterday in a conference sponsored by the Fed Reserve of Atlanta. While the Fed chairman believes the FOMC’s actions have “bolstered confidence,” he made it perfectly clear in his satellite presentation yesterday that we ain’t out of the woods yet.

“I doubt that we’re halfway through the financial crisis,” suggested Jim Rogers this week at a conference in Singapore. “We certainly haven’t hit the bottom…

“Most of the European banks and Asian banks haven’t taken a huge write-off yet. I suspect there are more write-offs to come in Europe and Asia.” According to Bloomberg, banks and brokerages have written down around $319 billion and slashed 65,000 jobs thus far. So if we’re not even halfway… ouch… you do the math.

If you’d like to hear more from Jim Rogers, you’ve got to join us this July in Vancouver. He’ll be speaking along with a remarkable cast of characters. Get the details here.

“I just played golf with the retired fire chief from my city,” writes a reader, responding to our claim that state municipal pension funds are in danger of insolvency. “He retired at age 49 with a $160,000 a year retirement package. He is consulting for another city — 20 hours per week — for six months for $180,000.

“The upside was that he had the worst freakin’ slice of any golfer I’ve ever played with. Even $340,000 per year isn’t going to fix that sucker. On the other hand, I’d trade my game for his retirement.”

“As developing countries increase their standard of living,” writes a reader, “they are following down the road of their capitalist pig cholesterol-loving neighbors, demanding more meat for human consumption.

“But it takes seven pounds of grain to make one pound of meat. So not only is more and more of the grain going into ethanol to feed SUVs, but also into cattle to feed more humans.

“If people were vegetarian, there would be more grain around to feed more people. It may take decades, but eventually no one will eat meat.”

The 5 responds: People have been eating meat for a couple millennia… might not want to place any bets on that trend reversing.


Ian Mathias
The 5 Min. Forecast


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