Oil Prices Above $100 Threaten Recovery, Stock Market

03/04/2011 05:43 pm ET | Updated May 25, 2011

Higher oil prices trumped the lower unemployment figures today. Violence in Libya trumps signs of economic recovery; 8.9% unemployment and a 3.1% gain in factory orders.

The Economist cover today says it all; "Just as the world Economy was recovering," came the "2011 oil shock." After all, the Middle East and north Africa produce more than 1/3rd of the world's oil. Mull that factoid thoroughly over the weekend.

Another run-up to $103 for West Texas crude and $116 for Brent oil -- the unpleasant ramifications of Middle East unrest -- are a much more powerful dynamic than the reduction of unemployment in the US below 9% for the first time in 2 years.

This is called the unexpected ramifications of geopolitics as a monkey wrench into the quantitative easing policy of the Bernanke Fed. Welcome to global risk! Revolution can indeed disrupt oil supply, shake confidence in a recovery, and drive investors to panic and sell. Investors in the stock market are the new refugees, unseen, but heard.

Higher oil means lower stocks, as Wall Street deals with the expectation of the economy's renewed momentum slowing down. A slowing down economy means a slowing down earnings projection and profit taking after the sensational run-up since last summer.

At $100 a barrel, the cost of oil will raise the costs of transportation and production of many goods, cutting down some measure of already modest projections of economic growth.

"We do not see $100 oil derailing the US expansion. However, if sustained $100 oil could shave some 0.3% to 0.5% from GDP, implying 2.7% growth in 2011 instead of 3.0%," says Marshall Front, founder of Front Barnett LLC, a Chicago investment counseling firm. "It would take gasoline prices above $4.00 a gallon for a protracted period to threaten the expansion."

The ultimate scare scenario, brought to us by perpetual bear Nouriel Roubini, is the provocative prediction that $150 oil (higher than July, 2008) will take 2% out of GDP. Nasty; better pray for the Saudi monarchy to stay firmly in control, and Iran, Kuwait, UAE are able to maintain their usual production for export.

Gold and silver still acted strongly today. Silver, incredibly, rose over $35 an ounce, and is up 25% since we first recommended it last fall. But traders like Dennis Gartman, a technician with a big following (CNBC's guru) and GLD, the huge ETF, have been sellers in February. (GLD had outflow over $700 million in February -- after being down $2 billion in January. We reported that turning point phenomenon.) As GLD goes, so might gold in the short run.

Now comes Larry Fink, CEO of BlackRock, asserting his investment attraction to the much maligned dollar. You will recall the rule of thumb that 70% of the time, when the dollar is strong, gold is weak.

Fink, founder and CEO of BlackRock, the largest investment management firm in the world, with $3.5 trillion in assets, is predicting a 4% coupon for 10 year Treasuries, and as a result a strong dollar. He is a major buyer of dollars, and if correct a rising dollar will be a depressant for gold prices. "Inflation in the long run will not a be a problem," Fink said on TV this week. "I'm a very big buyer of the dollar."

Not good for the gold bulls, John Paulson and George Soros -- and their flock of followers. You heard it here first.