In football, when a running back intends to cut to the left, he often first fakes right.  This move is designed to make the defense commit its resources in the wrong direction.  It is my experience that markets often follow a similar path. 

Just prior to a major move in one direction, markets often make a sharp move in the opposite direction first. With respect to the dollar, gold, oil and other commodities, many on Wall Street have bought into the fake – and will soon be watching in amazement as the runner sprints to the end zone.

Over the last few months, as the dollar rose more than 10% against a basket of other currencies – and as gold and oil sank to multi-month lows – many investors concluded that a threshold had been crossed, and that the bearish trend for the dollar and the bullish trends for commodities had finally come to an end.  But rather than representing a sea change, these countertrend moves more likely signify that the previously established trends are about to kick it into a whole new – and much higher – gear. 

My take is that if you already thought you had seen a bear market in the dollar and a bull market in gold, oil, and other commodities, well, “you ain’t seen nothing yet.”

Corrections are often vicious, designed to shake loose as many investors as possible prior to a major move.  The best bull markets carry as little excess baggage as possible.  With few speculators on board to sell into every rally, the true believers who remain can receive the full benefit of a fundamental upswing. 

Violent downward moves also force out those that were too highly leveraged, or those who showed up late to the party with little understanding of the true fundamentals.  Those who panicked and jumped out too low often scramble to reestablish positions at higher prices, further fueling this next leg of a bull market. 

This recent correction saw the most dramatic change in sentiment that I have ever witnessed.  But the fake that caused the market to commit was, in fact, not worthy of a high school benchwarmer.  With absolutely no significant developments that could explain either a top in the dollar, or a bottom in commodities, investors placed their faith in price movements alone.  Once the numbers started to show some retrograde motion, everyone simply assumed that a real change had taken place, and the momentum buying and selling began.

The rapid movement reveals how clueless participants in these trades had become. Even those fund managers who typically seem to understand the market’s fundamentals were fooled by the sharp price movements and the rhetoric that they spawned.

Lacking any real change in fundamentals, such abrupt changes in sentiment following extreme price swings are as bullish a sign as I have ever seen.  There is absolutely no basis for a significant dollar rally, or further weakness in gold, oil, or other commodities. 
  
The United States is the focal point of the world’s financial turmoil. We talked creditors around the globe into loaning us trillions of dollars.  Now that it’s becoming increasingly apparent that we cannot pay the money back, Wall Street has concocted a scenario where our shell-shocked creditors respond by loaning us even more.  More alarming is that many brain-dead investors see this as a likely development.

The fact is that the outlook for the dollar has never been bleaker and the prospects for gold and other commodities have never been brighter.  The rationale for a new dollar bull market, or bear markets in commodities, is just as flawed as those used to justify investments in Internet stocks and subprime mortgages.  Interestingly enough, it’s mostly the same suspects advancing the arguments.

[Editor’s Note: Peter D. Schiff, Euro Pacific Capital Inc.’s president and chief global strategist, is a well-known market commentator and a regular contributor to Money Morning. Hemost recently wrote about the gloomy "financial reality" that’s facing U.S. consumers and feeding directly into the looming "Super Crash." To get our report on the once-in-a-lifetime profit plays that will emanate from this Super Crash – while at the same time getting a free copy of Schiff’s New York Times bestseller "Crash Proof: How to Profit from the Coming Economic Collapse" – please click here.]

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• Money Morning Exclusive Jim Rogers Interview From Vancouver (Part I):
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• YouTube.com: Bachman-Turner Overdrive:
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Every president has a defining moment when the American people, and indeed the world, recognize that he’s badly out of touch with some aspect of reality.

I can’t help but think that President George W. Bush ["Dubya"] has just had his moment as I watch him muddle around an unsympathetic Middle East this week, pushing for lower oil prices.

The market just isn’t going to let this happen.

Turning on the petroleum spigots as he’s requesting isn’t going to solve the problem. Indeed, we don’t even believe that a solution exists.

Here’s why.

The oil markets right now face a situation known as "backwardization." This theory holds the future prices of a commodity will tend to rise over the life of the contract. The upshot: Near-term contracts trade at a higher price than the longer-term contracts. With oil, that means that near-month delivery contracts are priced more expensively than distant-month contracts. When this happens, market sellers have every incentive to sell as much as they can as soon as they can to maximize profits, since they know that future prices will be lower.

What this suggests is that no matter how much pushing, prodding or – in this case – begging Bush does, the markets are still likely to push prices higher in search of profits. The Saudis will want to sell all the oil they can at the current high price, and will do nothing to risk sending prices lower.

That means: No production increase.

Let’s walk through an example to illustrate how this works.

The February 2008 oil contract closed Tuesday at $91.65 per barrel, while the December 2008 contract settled $2.90 a barrel lower, at $88.75. Accordingly, the markets are telling oil sellers that it’s better to sell oil now than it is to sell it later.

At the same time, however, the market also is telegraphing to buyers that they can risk purchasing later at lower prices. But – and here’s the important part – the discounted price could push far higher as the delivery month draws closer.

When the markets exist in this state, it is in the seller’s interest to sell as much oil as they can as soon as they can, which makes what Bush is asking all the more absurd.

In 2006, Saudi Arabia produced 10.72 million barrels of oil per day. For purposes of illustration, let’s assume they sell it for February delivery. At $91.65 a barrel, that sale would result in a staggering $982.5 million in revenue. If they waited and sold it at the December 2008 contract price of $88.75, they’d receive $31.1 million less per day, or $951.4 million for their efforts.

You can do the math as easily as we can. Over the course of a year, that would net out to an "opportunity loss" of $31.1 million a day, or a net revenue shortfall of $11.3 trillion per year if the Saudis elected to sell later.

This means that by asking the Saudis to increase production in an effort to lower oil prices, President Bush is effectively suggesting that they shoot themselves in the proverbial foot to the tune of trillions of dollars in lost revenue – which is why we think there’s a not a snowball’s chance in Hades that anything other than a short-term reprieve might be possible.

But, just to play devil’s advocate for a minute, let’s assume that the Saudis decided to play ball.

Could they?

We don’t think so.

The massive Golar oil field, along with many of their fields, is in decline, and anecdotal evidence suggests that the Saudis have already reached their peak. Not only are they pumping massive amounts of salt water into their oil fields to sustain production, they’re also drilling enough wells in the region to make it look like a giant piece of Swiss cheese from the air. Add in the fact that the Saudis haven’t had a major new discovery in half a century, and we have all the ingredients for still-higher-higher prices – and that’s assuming they actually have what they say they do in the way of reserves.

However, there’s an increasing body of evidence suggesting that the Saudis have falsified their reserve counts since the 1970s, a scenario that author Matthew R. Simmons outlined in his book, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy."

We’ve been talking for years about how this reality would ignite upward pricing pressure in the petroleum markets, but the possibility that the Saudis might not have been telling the truth and may actually be unable to meet global demand is something that the masses have only recently started to consider.

And trust us, when they do, the fear that there may not be as much oil as previously thought will send it up to the high-$100 price point I’ve been predicting faster than you can blink. And the price may go even higher than that.

Then there’s the Organization of the Petroleum Exporting Countries (OPEC). The Saudis risk upsetting the apple cart if they move in a direction contrary to other decidedly anti-U.S. OPEC members who want prices as high as possible for as long as possible. Many people think of OPEC as one big happy family. But the truth is that it’s often no better than a den of thieves who would just as soon cut one another’s throat as cheat on production quotas in search of still more profits.

So the bottom line is that Bush can saber-dance his way through the Middle East all he wants, but his machinations are likely to be viewed within the context of history as too little, too late. Perhaps he could have done something about this the last time he met with Saudi’s King Abdullah, and oil was still at $50 a barrel.

But now that oil is north of $90… forget it.

The Saudis, like other OPEC nations, have gotten used to higher oil prices and the global wealth that goes with it. They’ve also finally figured out that oil can be as much a political weapon as it is an economic one. For them, controlling the petroleum flow is better than having an army to field when it comes to assuming a more-important place on the world stage.

That makes it even less likely that they’ll lower oil prices out of the goodness of their hearts.

And that spells higher oil prices for years to come… even if by some stroke of luck we actually do find that snowball in Hades, and get a temporary respite.

News and Related Story Links:

• ABC News:
  Bush Asks Saudi King to Open Oil Spigots; Makes Personal Appearance After Public Rejection

• FinancialDictionary.com:
  Backwardization.

• Amazon.com:
  Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy