Tom, ANOTHER's basic theory is intriguing and makes alot of sense, whether or not our leg is being pulled.
I was mulling over it when I read the disappointing posts on Kitco this morning.
Some points in support, which I'd appreciate comments on.
1. The price of oil and gold are the same or lower today in nominal $US terms than they were 20 years ago. That's not even close to true for the dollar's purchasing power generally, as anyone whose bought food, clothes, autos (or stocks) knows. Suggests that gold and oil are being depressed (in dollar terms that is) and that the two are linked.
2. The divergence of M-3 and the price of gold. Read Milhouse's "Gold v. Dollar" analysis at Kitco. M-3 and POG have hostorically (and logically) been correlated because more M-3 = lower dollar value = higher POG in dollar terms. But in recent years, M-3 has gone up while POG has gone down. Milhouse explains this in terms of lower inflation because of dollar demand by foreigners. But here's another explanation: the more M-3, the less the dollar is worth, the more we have to compensate "Oil" for their oil, the lower the price of gold has to go. Might explain why gold is no longer an "inflation hedge."
3. And speaking of foreign demand for U.S. dollars, why is the dollar accepted as the world's reserve currency? What makes the U.S., a huge debtor nation, so special that the world would use dollars as a universal store of value? One answer that makes sense is that the dollar is pegged to oil. So long as I can "redeem" a barrel of oil for $16 or so, the dollar makes a decent store of value. How is this maintained when the U.S. money supply is increasing substantially each year? By paying off the oil producers with gold.
4. Why does the POG go down in the midst of a major currency crisis in Asia when that's when it traditionally goes up? I don't buy for a second the the official "reduced demand" explanation. One explanation is that at such a critical time for the world economy it becomes more important than ever that oil be cheap. Given the above assumptions you do that by lowering the POG. Even U.S. analysts haev speculated that the FED "called in some favors" witht the Saudis as part of the plan to deal with the Asian flu.
There are a number of implications of all this, but I'd be curious to hear comments. |
