Gold & oil as money
Are gold and oil now acting as money in measuring real-world values...?
FACED WITH gyrating currency markets every day, it is difficult to get a real "price" on anything at the moment.
We have often asked the question here at GoldForecaster.com, what is the price of gold? If it is $670 or $660 per ounce, then we ask, what is the price of the Dollar?
Should the Dollar be valued in gold, the other way round to now, when we look at Gold Priced In Dollars? The very same question could now be asked of oil. Why? Because the value of the Dollar is now subject to question internationally.
Three years ago, the world's oil producers were happy with an oil price of $35...then last year with $60...and now the indications are that they are happy with $70 per barrel, because the global economy is still growing with oil at that price. This is the criteria the oil producers set, and they ignore any demand-side definition of price.
The buying power of oil is not the criteria, as such. It is how high the price can go without hurting global growth. This makes oil a definition of money, a measure of the value of the Dollar in market measurement terms. In moving highger, oil has taken an important step in redefining values. It is now fair to say that $70 is worth a barrel of oil. With such a heady price rise, the valuation of a currency in terms of income achievable – or indeed, in terms of interest – is going out the door.
Yes, the OPEC oil cartel did open the taps when the oil market faced real shortages earlier this decade. But that was only to show good faith in providing sufficient oil to avoid unnatural shortages, potentiallly damaging the need for oil in the global economy.
This does not make oil act as money, however, for it does not meet the popular measures of money – that money needs to be durable, a luxury, divisible and portable. Yes, oil meets some of the criteria, which enable it to take this position. It does so on a world-wide front simply because we have arrived at a position where OPEC. firmly controls the market in oil and will do so long as it is supply dominated.
Gold, on the other hand, retains the ultimate role of money because like oil, it is not an obligation of man. It has the advantage of oil in that it can be easily carried in coin form. Gold is also durable in small as well as large quantities.
But oil has the advantage of gold in that oil is needed by everyone, whereas gold remains a luxury until it is needed in extreme times, when paper just doesn't do the job.
It is the need for oil that has given it power as a defining measure of paper money, and will do so into the future as demand overtakes supply. What oil producers have also been saying by indicating the acceptable price of oil to them is that while they have to accept payment in the US Dollar, they are fully aware of its falling buying power and will ensure that the oil price will rise to compensate that fall.
It is a very strong statement to make, and it demonstrates OPEC's full control over its income from oil.
We now have to recognize that OPEC are focusing not on the receipt of the best currency – perhaps the Euro in future, or certainly the Yen from Japan as demanded by Iran – but they are being pragmatic in accepting the Dollar for what it is, while defining its value on an ongoing basis. By letting the price rise, and ensuring that the paper obligations of governments in all currencies are measurable in terms of oil, OPEC are highlighting the Dollar's true role today: simply a means of exchange.
The reality of this is that oil now measures value better than the Dollar, and it will do so for as long as the globe is dependent on it.
The shift we have just described is that paper money has taken a step backwards, particularly the Dollar, in terms of the globe's confidence in it. For the full article, covering the credit squeeze and the investment climate from now on, please visit and subscribe to GoldForecaster.com...