NEW YORK ( TheStreet) -- The printing presses are running 24/7, the debt levels are unsustainable, China and India are showing growth, gold is a storehouse of value, _____ (insert the latest reasons here). The reasons for gold moving higher continue ad nauseam despite inflation's deafening silence.Pundits of higher gold prices have called it correctly for so long; many have likely forgotten what it feels like to get it wrong. The $2,000 gold hysteria and subsequent price fall is déjà vu all over again (thanks Yogi Berra). If you're old enough to remember, the gold bubble song played in 1980 along with Diana Ross's hit "Upside Down," which is what gold investors quickly became if they bought and held. In the first weeks of 1980, most newspapers printed gold prices on the front page: $1,000 an ounce (and higher) was declared a "sure thing." Prices didn't bottom after until reaching lows under $300.
The direct relationship with energy and commodity prices comes from almost every product having a large energy cost component. The easiest relationship example is at the fuel pump with gas and diesel. The cost of oil has a very high correlation to the price of gas we put in our vehicles. As the price of diesel falls, the cost of shipping, trucking and rail also falls. Lower transportation costs of products we buy, regardless if through mail order or off the shelf, result in lower sticker prices. Lower sales prices are by definition, deflationary. The same holds true for production costs of almost everything. Plastics come to mind quickly; however, don't forget that fertilizer, medicine, tires, roofing, shampoo, dentures, artificial turf, soft contact lenses, lipstick, DVDs, toothpaste, pillows and even the monitor you're using to read this article is made with petroleum. All of it is dropping in price as oil moves lower. Inflation is not leaving today or tomorrow; inflation took an early flight out yesterday and is nowhere to be found. How can we be sure inflation won't decide to come back next week? No one can know for sure; however, we can look at facts to draw a logical conclusion. In the hoopla of Facebook's xanadu IPO, you may have missed a significant change between Alaska and North Dakota this week. North Dakota pushed Alaska's ranking down to become the No. 2 oil-producing state. What makes this statistic particularly interesting is that North Dakota is only at the beginning of its potential production capacity. The more capacity and transportation become available, the less oil will cost. The best is yet to come though, because as domestic sources increase in proportion of total needs, the less supply-risk premium is added. Taking on the risk of a problem in North Dakota is a whole lot cheaper than taking on the risk of a Middle East problem.
Long-haul trucks are just now joining in, while taxis, local delivery vehicles, busses and other traditional petroleum consumers have demonstrated reliability for years. It's just a matter of time before passenger vehicles are sold with natural gas as the energy source straight from the factory. Aluminum, copper, lead and nickel prices are all also trading near 12-month lows. If the price of gold is directly related to non-existent inflation in U.S dollars, gold is not going to climb. It really doesn't get much simpler than that. But . . . but . . . but . . . the Fed's printing press is working overtime and dollars are flooding the market! Inflationary money supply growth may be true and wisely monitored; however, the material importance is the relative lack of dollars exchanged for products. Remember, there are two sides to supply and demand. An increase in demand (more dollars) will not result in an increase in price as long as a relative increase in supply (like nat gas and oil) occurs. The situation in Europe only builds the gold bear case as a result of gold priced in dollars. As the euro falls in value against the dollar, demand for gold decreases. The U.S. 10-year yield closed at a record low of 1.71% on Thursday. I am not attracted to locking in capital for 10 years at less than 2%, but obviously, enough believe it's a good idea to make it happen. 1.71% yields is the market equivalent to a neon sign flashing "no inflation." As a result, gold bulls refusing to adapt may soon become reacquainted with another song of 1980: "You've Lost that Lovin' Feelin'" by Hall and Oates.