Oil Bubble is Bursting, Dollar's Fall is Reversing

Two good things are happening now: the price of oil is nose-diving and the value of the dollar is increasing. First, oil.

The article goes on to blame mostly speculators for the mammoth rise in the price of oil. According to this author, speculators were overly pessimistic about what growing demand in China and India, potential for war in the Middle East and elsewhere, stubborn OPEC chieftans, and the arrival at the mythical "peak oil" point would do to prices. Too much gloom and doom led these speculators (speculators is almost a slur at this point; it shouldn't be) to bid up the price of oil way above where it should be. Hence, the bubble.

Now onto the dollar that some have been saying was going to be dumped as the world's major currency.

Instead of this incessant doom and gloom about the financial outlook of the American market we are seeing some positive signs. The increasing value of the dollar is equivalent to a bubble bursting in foreign currencies. And one more thing is going to come from this: gold is no longer the must-have miracle investment:

Why is this happening now?

Who knows for sure but I'll try to explain it. Think of a nation's economy as Wyle E. Coyote. Sometimes, Mr. Coyote will run off a cliff and not realize he has done so until he has run a couple of yards off. Then, realizing he has nothing below him, he falls.

That is what is going on here. For a myriad of reasons investors bid up all sorts of commodities. This was a shrewd investment a couple of years ago because there was a ton of uncertainty about where the world was headed and diversifying your portfolio with commodities made sense.

But diversification morphed into something else. Investors of all stripes over-weighted (moved from a ten percent stake in commodities to a fifty percent stake, for example) their portfolios with investments that, historically, don't provide great long term growth. Commodities, in the long run, is all about a race to the bottom with every player trying to produce the same thing (gold, silver, oil) for a cheaper price than their competitors. In the long run oil stays fairly flat, so does gold, and so does every other commodity.

Here's a link to a graph of the inflation adjusted price of oil [HERE]. What you will see is that the price of oil sloped downward from the late 1940s to the early 1970s. Then there was a spike until the mid 1980s when oil fell back down to a normal level. Then 9/11 spurred the most recent bubble in oil. The point is, commodity prices won't continue to go up without a break - well, unless there is truth to "peak oil" (I'll believe that when I see it).

The dollar is increasing for many of the same reasons oil is plummeting. Without any proof to the hysterical worryings of investors (there's going to be WWIII! Stagflation! etc.) the Wyle E. Coyotes of currency speculation have realized they went too far and have already run off the cliff.

America's trade deficit is shrinking, it's economy isn't nearly as bad as feared, other economies (Europe, China maybe, Japan) are faring much worse, and the threat of war with Iran isn't seen as a certainty anymore.

This is why the market needs to be allowed to work. Tariffs won't improve anything one bit, currency manipulation hurts domestic economies in the long run (Bernanke and Greenspan, I'm talking to you but more pointedly I'm talking about China), oppressive regulations and overzealous subsidies warp the market's true nature.

Let the markets work and the world will be a better place.