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Gold/Mining/Energy : Gold Price Monitor
GDXJ 96.88+0.9%Nov 18 4:00 PM EST
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To: Michael who wrote (7726)2/21/1998 1:18:00 AM
From: PaulM  Read Replies (1) of 116762
 
Michael, there's a lot in there. Re: the money supply expansion and its failure to cause prices other than oil and gold to rise........that's not exactly true.

Oil and gold are currently priced in nominal dollar terms about where they were in 1979! There's been 20 years of inflation since then. See if the sticker on your auto or the price of a head of lettuce hasn't changed in that time.

If anything, ANOTHER's theory explains a somewhat puzzling phenomenon: huge increases in money supply in the 80's and 90's hasn't resulted in 70's style inflation. Some have said this is because money flowed into the stock market instead of goods and services. A better explanation mentioned sometimes is that despite all those money increases, foreigners have a seemingly insatiable demand for these constantly created dollars and have provided cheap goods in return.

But what no one has explained is WHY? Why are foreigners willing to hold so much greenback? One possible answer is that the the dollar is the only currency backed by somethign real: Oil. So long as I can redeem a barrel of oil with $16 (i.e. so long as the dollar is on the Oil standard) it makes sense to hold dollars.

When the price of gold (and therefore oil) begin to run away in dollar terms, the dollar is again unbacked paper.

My main problem with the theory is that it's an inefficient payoff. Why not just give the Saudis the gold directly. By driving the price of gold down instead, everyone else can take advantage of the "payoff," eventually the price goes up, putting an end to the sweet deal.
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