The Facts About Inflation and Energy Price Trends

The chairman of the Federal Reserve, Ben Bernanke, gave Congress a positive view of the economy yesterday, predicting that declining energy and commodity prices are likely to reduce inflation. “There are some indications that inflation pressures are beginning to diminish,” Bernanke told the Senate Banking Committee.

The popular stock indexes rallied on this news. The Dow closed at an all-time high of 12,741.86. The S&P 500 rose to a six-year high of 1,455.30.

Since a market downdraft will eventually occur and one of these new highs will become the bull market top, it is my job to look at the other side: to review the facts critically, and see if the assumptions being made by the market are correct.

“There are some indications that inflation pressures are beginning to diminish.”

Bernanke probably studies inflation pressures by looking at economic data. I look at the three-year weekly charts for Crude Oil, Gold, and the CRB Index. Inflation pressures can not abate if those three are rising!

My read on these three is that they have finished a normal bull market correction, and are they are about to begin a new upswing which could be sharp and prolonged.

Crude Oil appears likely to challenge $70 this spring and could easily rise to $80 or higher later in the year. Gold has already risen strongly from the correction lows and appears ready to take out the old high of $730.40 in the near future. And the CRB Index, arguably the best measure of raw material costs which could impact consumer inflation, looks quite similar to the Crude Oil chart, only even more bullish. I believe the bull market in commodities is about to resume with vigor.

In view of this information, I believe the stock market’s optimism is not justified. I think inflation will remain problematic for the Fed. I do not believe they will cut interest rates this year and I suspect they actually may be forced to raise rates. I am very comfortable with my heavy commitment to energy stocks and my growing commitment to gold mining stocks. I expect the utilities, financial sector and REITs to come under pressure in the near future, perhaps enough to create a buying opportunity.