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Article - In Gold We Trust


#1

Just read this commentary on gold. Explains succinctly the problems
that precipitated and will possible continue gold price increases.

Lisa, (Leaving for Paris next Friday. Any Orchidians in Paris to
visit?) Topanga, CA USA

In Gold We Trust
By DAVID RANSON and PENNY RUSSELL
May 18, 2006; Page A14

Widespread fear of another global energy crisis is rife, especially
in light of the confrontation with Iran. But the second of Murphy’s
Laws cautions that what actually goes wrong is seldom what we
anticipate. While the markets are clearly indicating something
ominous, the current situation is mischaracterized as an energy
crisis – even if the price of a gallon of gas goes past $3 and
stays there. Energy prices are simply keeping pace with the rising
prices of gold and other commodities. What we are facing is a money
crisis: an alarming outbreak of inflation and all its consequences.

It’s silly to blame the rise in commodity prices on foreigners; no
country, not even China or Saudi Arabia, has the market power to set
off the kind of across-the-board acceleration in prices that we have
been witnessing. Nor can prices rising this consistently and at this
speed be attributed to an excess of global demand over supply, or
fears about the political situation in Iraq or Iran. Speculators,
another convenient scapegoat, also lack the power to drive world
commodity markets, in spite of their rapacious reputation. The real
culprit is the precipitous decline in the world’s mightiest
currency, the dollar, which has lost more than 60% of its gold value
in just four years The run on the dollar is largely being ignored by
Washington and Wall Street, and most of the financial press is only
beginning to take note. When analysts do comment on the strength or
weakness in the dollar, they are most often referring to its value in
terms of foreign exchange; little attention is given to the value of
the dollar in terms of gold. When headlines do herald that the price
of gold is rising, there is little recognition that, since gold is
quoted in dollars, it is just as true that the dollar is falling. It
is gold that is a benchmark for the value of the dollar – not the
other way around. When the dollar price of gold is on the rise, the
dollar prices of oil and other commodities have historically kept
pace. I just

It is only the nominal price of oil that has reached record levels;
in real terms, we are still on the road to recovery from the genuine
energy crisis that culminated with Hurricane Katrina. Although it is
the accepted convention to calculate the real price of an asset from
official government measures of inflation such as the CPI, this
would be a mistake in the case of energy. Since oil is traded in
fast- moving markets worldwide, its real price can only be assessed
by comparison with other internationally traded commodities; for this
purpose the U.S. cost of living index is irrelevant. We suggest
instead using an index of precious-metals prices.

The adjacent chart shows the divergent picture of the oil market
that emerges when representative oil prices (West Texas Crude) are
expressed in real terms. The solid line charts changes in the ratio
of the price of oil to a price index for precious metals over the
past half century. While the chart shows abundant variations in the
real price of oil over time, it also shows the real price
gravitating around a slowly rising trend. The dotted line represents
the equilibrium real price of oil. We believe that its gradual upward
slope reflects the fact that oil is gradually becoming scarcer with
the passage of time.

The chart confirms that the real price of oil peaked out late last
year and has been on the decline since. In other words, the dollar
has been falling relative to its precious-metals benchmark faster
than oil has been rising relative to the dollar. That’s why we
believe that the current rise in the dollar price of oil is merely
the process by which this price converges toward equilibrium. Far
from entering into a new crisis phase, the oil market is still
cooling off from the last one.

We estimate from nearly a half century of history that the
equilibrium price of oil, converted back to current dollars, was
about $61 a barrel in April. In other words, the long-term history
of the ratio between oil and precious-metals prices, given the prices
that these metals have now reached, implies that the oil market
would be in balance at $61. The actual price in April was $70.
Reading from the graph, we see that the real price of oil has moved
two-thirds of the way back to equilibrium since Hurricane Katrina.

It’s not the time, however, to breathe a collective sigh of relief.
It is just as foolish to fail to recognize a true crisis in the
making as to conjure one up. As of this writing, gold is fluctuating
around the $700 mark, with silver and platinum up at least as much.
The gold value of the dollar appears to be going into free fall, and
the further it declines the more dire the consequences, including
still higher nominal prices for energy, even without any further
change in the real price. Absent some miraculous reversal, $3-a-
gallon gasoline may be here to stay.

If none of the usual suspects is responsible for gold’s sharp rise,
what is? We believe it represents an equally sharp decline in the
confidence of investors – large and small – in the likelihood that
Washington will pay back its mounting obligations in undepreciated
money. Throughout history, and especially in wartime, governments
have escaped from fiscal over-commitments by letting their
currencies depreciate. Ambitious spending initiatives, threats of
international conflict and even Washington’s political unpopularity
all contribute to the fear that this is happening again now.

Gold is the barometer of public confidence in fiat money, and it is
difficult to rebuild confidence in a currency once it has been
allowed to slide. Gold has been a reliable harbinger of many
economic troubles – not just of escalating prices at the gas pumps,
but of inflation, rising interest rates, stagnation and poor
investment performance on the part of bonds and equities alike.
Changes in the price of gold are an excellent predictor of all of
these. The dollar’s collapse is nothing less than a body blow to
capitalism. When we downplay the significance of energy prices, we
are not denying that a crisis is looming. It’s just a lot more
threatening than an increase in the cost of a tank of gas.

Mr. Ranson and Ms. Russell are principals of H. C. Wainwright & Co.,
Economics, an investment-strategy research firm.


#2

That’s a very interesting article, and largely accurate, I think (as
though I know all that much about economics, like most people). On
some level, though, I might say, “Spoken like a true economist.”,
because there are two things it doesn’t {tacitly} recognize. First,
that people the world over have an emotional attatchment to gold,
that is, financially. Anytime, historically, there is uncertainty of
the future, like the Cuban missile crisis or Iraq, people start
buying, if not exactly hoarding, gold. “It’s something solid that I
can hold onto.” And it is true that it’s a universal currency. The
point being that often times there is no rational, economic reason
for a rise, but there are irrational emotional and social reasons for
it, if you look. The second point being that the price of gasoline
has little to do with anything except what big oil says it is. It is
naive to think that it is truly regulated by government or supply and
demand in the real sense. Prices of gasoline (not oil - gas) rise in
the summer all over America because it’s a bonanza for the oil
companies. It is almost identical to DeBeers holding diamonds to drive
up the price. Gasoline prices jump 25%, Big Oil has record profits,
yet congress can see no corellation between the two. It is “Economic
Factors” or some such. Like we’re all stupid. I took us 20 years to
recover from Reaganomics, let’s see how long the ripples last from G.
Dubya “Draw Stranger” Bush.


#3

Oh…for those who were wondering about my source for the article,
it was a commentary in yesterday’s Wall Street Journal.

Lisa, (June gloom has set in here. The bad bad goat boys got out
yesterday and ate my roses. Grrrrr) Topanga, CA USA


#4

It’s hard to believe that gold is more valuable than oil given the
many uses for oil and oil/petroleum based products vs gold, and the
limited supply (isn’t kuwait rumored to run out of oil in 80 years?).
I would think the dollars value be compared against oil these days as
opposed to gold/silver.

Craig
www.creativecutgems.com


#5
It's hard to believe that gold is more valuable than oil 

Of course I think we should have discontinued pertrol based fuels for
the most common transport ages ago, but mulyinational oil firms are
far too powerful to allow hydrogen/etc based technologies to reach
their ‘viable replacement values’ (in other words I don’t want us
burning coal to generate electricity to plug into our cars, or do
generate the needed hydrogen, and other dirty methods before reaching
the ‘evironmentally clean’ option)… mind you I like nuclear power,
although I think that the fuel should be scrubbed and reused and that
decommission dates should be looked when they are past their 10 year
mark (surely new would more efficient and repairing tubes due to
erossion in heavy water plants is a real problem)… basically I love
my plastics/silicon/etc and would hate to loose them because my SUV
and my child’s ate all those resources (of course I walk/bicycle, but
I digress).

To the point at hand, something interesting you may like…

  Peak Oil and Peak Gold 
  By Roland Watson 
  April 24, 2006 
  newerainvestor.com

  As someone who has kept track of the "Peak Oil" movement for a
  few years now, it comes as no surprise that oil prices have
  risen nearly six fold since they hit rock bottom in the late
  1990s. Does this mean Peak Oil has already arrived? Not
  necessarily, but we note that a final peak in global oil
  production needs to be preceded by a continual decrease in
  excess crude oil production capacity. When capacity reaches
  zero, then Peak Oil arrives. That capacity has been dropping
  now for several years. 

  But what can that current debate about oil teach us about gold?
  Gold, like oil, has been continuously rising in price for five
  years. Admittedly, its performance has been poor compared to
  oil, but does this price mechanism also indicate the mining
  equivalent of reducing "excess spare capacity" and is it also a
  prelude to "Peak Gold"? My conclusions led me to believe that
  these two commodities are similar in terms of a Hubbert's Peak
  analysis and in terms of the effects of a peak in global
  production. 

  Firstly, Peak Oil based on Hubbert's theory of oil production
  versus reserves states that production goes into decline at
  about the halfway point of remaining reserves. How does this
  play out for gold? Based on the United States Geological
  Survey's 2006 summary for gold, about 152,000 tonnes of gold
  has been mined out of the ground since man first dug out those
  shiny yellow nuggets. 

  Furthermore, the USGS estimates a remaining reserve base of
  90,000 tonnes. So, from the point of view of peak being the
  halfway point of reserves, gold should have peaked at a
  remaining reserve base of 121,000 tonnes (152,000 plus 90,000
  divided by 2). When was this the case? Backtracking 31,000
  tonnes of global mining output gives us the year of 1993. 

  However, a look at the graph below of global mining production
  shows that gold output merely dipped in 1993 as recession hit
  the Western nations and then resumed a climb to a new high in
  the year 2000 (which has not been exceeded since). Now, despite
  climbing gold demand, mine output has been in decline since
  then. 

  (contines at: http://www.kitco.com/ind/Watson/apr242006.html) 

Kindest,
David


#6

In 1986 Ruth and I bought a beautiful historic house in Seattle. We
were fascinated to discover that we paid exactly (sort of) the same
price as the 1904 cost of construction–IN OUNCES OF GOLD!

Whether we recognize it or not gold appears to be the most basic
standard of value.

Dr. Mac


#7
In 1986 Ruth and I bought a beautiful historic house in Seattle. We
were fascinated to discover that we paid exactly (sort of) the same
price as the 1904 cost of construction -- IN OUNCES OF GOLD! 

I don’t know if this is accurate or not, but I have heard it said
that an ounce of gold should aprox buy a side of beef. I have no idea
what a side of beef costs because I have never looked into it, but I
think it is a similar idea of Dr Mac’s comment about inflating values
of real estate and gold alike.

Ed in Kokomo


#8

Rather interesting, this bit. When my hubbie and I bought our first
house in 1973, it cost US$24,000 and our new family sedan cost just
about $6,000. When we sold our home 10 years later, the house price
was $70,000 and a new family sedan cost around $18,000. That’s about
4:1, or the car cost about one-quarter of the price of a house.
Today, that ratio has gone out the window as real estate has shot up
and car prices have risen at a slower pace. There will probably be a
correction in the real estate market. Another interesting price
comparison is to think of movie tickets. In 1958, adult tickets were
35 cents… now it’s at least $7.50 - not to mention the cost of
popcorn!

Maybe we should go back to the gold standard for money. Yeah right -
as if THAT would happen!

Judy in Kansas