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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (62187)	1/17/2007 9:43:53 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

You are correct about the properties of gold but you miss the central idea. Both of them. 1) They do not have to demand payment in gold. If they want gold they can convert the payment to gold at any time 2) Fixing the price of gold to oil is simply not possible anymore than China can fix the RMB to both the US$ and the Yen at the same time The dollar floats against the yen and against the pound and against gold. China can not peg the RMB to both the pound and the dollar at the same time. It simply is impossible. There would be a risk free trade in one direction or the other and China would go broke if they tried it. Yes China can peg to the dollar but their currency bands have to be flexible enough to allow wide ranges on other stuff in their basket. People bitching about how much other stuff changes in their basket miss the big picture. Other stuff MUST change more rapidly if those currencies change more rapidly to the dollar. China can peg only to the dollar and not to the dollar and the YEN or to the dollar and gold. Opec would face similar problems. Right now gold is priced at say $620 an oz. It is pegged at some other rate in Yen and at some other rate in pounds. They can not demand a zillion ounces of gold for a barrel today anymore than they can ask for $100 a barrel today. If they could ask for $100 a barrel today why would't they? In fact they are cutting production (and failing) to maintain $60 barrel. Now whether that $60 ($50 is closer) is paid in dollars or Euros or Yen, or gold, convertibility assures those are all exactky equal. They could just as easily price in gold and it would not matter one freaking bit! It just would not matter. They can price in Yen tomorrow and that would not matter either. But what they can not do is demand a certain amount of gold and the reason they can't is the same reason they can not demand $100 US dollars. The market will refuse. Hell they can not ask for $60 right now and get it. If OPEC could set the price of oil it would not be $50 right now. Opec can no more dictate the price of oil in gold than they can dictate the price of oil in dollars! That is a simple economic fact. China can peg to the dollar (or to gold) but it can NOT set the price of gold or the dollar on the open market in relation to other things. Oil quoted in gold is as meaningless as oil quoted in Euros or Swiss Franks unless and until they take actual delivery in gold. That would drive up the price of gold, but it would not do a damn thing to the dollar or the euro or the yen or the price of gasoline. And if they want gold that can do it today right now, and pricing in gold does not have to happen first. That is the bottom line. Mish