Wednesday, October 13, 2004


Gold, Oil and the Dollar

There's a very good article in Asia Times Online by Jack Crooks, Ominous: The US deficit vs the dollar. The article makes a number of points:
1) The US is borrowing $540 Billion per year from foreigners or 5.4% of GDP.
...the deficit rose to a whopping US$166.2 billion for the second quarter of 2004. Annualized, that's $664.8 billion, or approaching 6.5% of US gross domestic product. As bad as this seems, it will probably get worse before it gets better.

2)In 1987 our trade deficit hit 3.5%. Our currency fell 42% before our trade went from deficit to surplus
"Economic history is utterly devoid of examples of current account adjustments that are not accompanied by significantly weaker currencies." - Stephen Roach, Morgan Stanley

3)For the first time ever the world's major currencies are fiat currencies unbacked by Gold. The three...are the US dollar, the euro and the Japanese yen, with the Chinese Yuan pegged to the dollar.

4)The relationship between Oil and Gold used to average 15:1 In other words one ounce of gold would buy 15 barrels of oil. Currently, one ounce of Gold will buy only 7.73 barrels of Oil. The author argues:
if (Greenspan) can somehow get the dollar price of gold to increase, it might take a lot of pressure off of the global economy by reducing the real cost of oil and clear the way for sustained economic growth. If you're thinking that, then you're thinking a weaker dollar
5) here's where the author and I part company. GATA (Gold Anti-Trust Action Committee, which is leading the way in exposing the manipulation of the gold market, orchestrated by various bullion dealers.) has for many years argued that there is an active suppression of the price of Gold. One reason being, a rising price of Gold would signal inflation. You and I know that the government statistics on inflation don't reflect our world. We see rising prices everywhere from groceries, to housing, to commodities. Yet, the alarm, a rising Gold price, is not working as it should. Sure, the price of Gold has moved from $250/ounce to $420/ounce, but if it traded insync with Oil it would trade at $750/ounce or higher. The consequences would be a sharply lower dollar, sharply higher interest rates and sharply higher prices.

Either Bush or Kerry will have two big problems; WW III and a Dollar Crisis.
Mover Mike

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