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6 Critical Money Making Rules

Crude Oil Is the New Gold Standard

Commodities / Crude Oil Aug 05, 2014 - 09:50 PM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: Today I want to tell you a story about energy - especially crude oil.

It involves my run in with the steak bandit...

Just stay with me here...


It begins last Saturday. On a trip to the local supermarket, I saw something you just don't see every day.

You see, I always do the grocery run. It is one of several clauses that have appeared over time in my marriage contract (no doubt about it, this is one document you need to read before signing!).

As I left the store, a crowd had formed outside. There were police all around and the parking lot had been sealed shut.

It turns out a fellow had shoved some steaks down his pants and made a dash for it.

By the time all of us had stretched our necks to see what was going on, the suspect was just sitting... in a car that wouldn't start... with the doors locked... and the windows up... in 90-degree heat.

All in all, he couldn't have been having a very good day.

Maybe he was that hungry. Or maybe he forgot his wallet at home and was late for a party. I'm not sure.

Either way, he was bound for the Allegheny County Jail.

(By the way, the jail is the impressive newer-looking building by the Monongahela River in downtown Pittsburgh. You can't miss it. It looks like an upscale Holiday Inn.)

But I digress; back to the steaks.

I must admit, for a while at least, there will be a question in the back of my mind every time I go to a barbecue. Like, "Any idea where that meat has been recently?"

However, aside from a possible commentary on the plight of some people in the current economy, the episode with the "steak bandit" brought back a memory, along with a broader implication for the energy sector.

Here's the memory and how it relates to energy...

Moving to a Better Monetary Standard

More than 40 years ago, during another bout with a sputtering economy and a declining dollar, I made a remark that drew a fair amount of attention. At the time, I had my own radio talk show in Chicago.

In response to a caller's criticism of the U.S. Federal Reserve and the declining value of the dollar, I made a suggestion (somewhat tongue in cheek) that was then embellished for several days...

"Why worry about shoring up the dollar," I said, "when what we ought to do is move to a better monetary standard."

My suggestion was we use something everybody thought was valuable - steak.

Well, the "steak standard" made the rounds, got mentioned in the local press, and landed me some interviews. There was a more serious point behind all the fun, of course, but it was lost in translation.

My point was this: Throughout history, money has had three primary functions. It serves as a form of exchange, it allows us to price very different articles and commodities, and it provides a way to store value.

By itself, a dollar or a euro or a ruble or a yuan is literally not worth the paper it is printed on.

Of course, these days, there are other ways to complete an exchange without the use of money as such. And the Bitcoin revolution indicates we may have other pricing alternatives. That leaves us with just the value storage function of money, which often turns into a discussion about whether or not we ought to return to the gold standard.

While it has provided the convenience of a common venue of measurement for centuries, the gold standard has always been a very artificial thing. There are, after all, very few real uses for gold. For example, unlike steak, you can't eat it.

Whatever storage value gold has comes from what governments, central banks, and traders give it. There is little utility in the metal itself.

Which finally brings us back to energy and its role in the economy...

Crude Oil Is the New Gold Standard

As I have discussed several times in Oil & Energy Investor before, crude oil is replacing gold as a more accurate storage of value in the economy as a whole.

Unlike gold, the value of oil is essentially measured by what we use it for. Oil, and by extension natural gas and electricity, comprises an essential and inescapable underpinning for every economic function.

Energy generally increases in price as economies improve because demand for it increases. On the other hand, in an economic downturn, energy prices tend to suffer a contraction.

But unlike a gold standard, which represents an official value declared by fiat, energy prices actually tell us something about the economic undercurrents.

For this reason, I continue to argue that the price of crude oil futures contracts are a better gauge of value stored than gold. Meanwhile, futures contracts for both natural gas and electricity are coming to occupy similar positions.

That doesn't mean we should start printing "In drilling rigs we trust" on our currency. But it does mean that energy has become the better barometer against which to value genuine assets.

Energy also has another advantage, unlike the opinions expressed by certain Middle America talk show hosts years ago.

You can't just shove it down your pants and make a beeline to the parking lot.

Source : http://moneymorning.com/2014/08/05/crude-oil-is-the-new-gold-standard-2/

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