Oil, gold and the US dollar
Posted by sanityinjection on August 12, 2008
This is an excellent piece by economist John Tamny explaining the relationship between the price of oil, the price of gold, and the US dollar. Tamny explains that you can predict changes in the price of oil by looking at the price of gold, since the two commodities have had a historically consistent price ratio to each other, and both are affected similarly by the relative strength or weakness of the US dollar. He points out that the oil crises of the past 40 years have mostly been dollar crises, and that the turnaround for the US dollar and the current low oil/gold ratio suggest a continued fall in the price of oil.
I must admit that until this year, I was publicly on record as a weak-dollar man. When the US dollar is weak, American exports are more competitive and foreign capital pours into our economy. However, I’ve come to realize that a weak dollar is poison when combined with increased demand for oil. I’ve learned, I think, that just like other aspects of financial policy, monetary policy has to be based on an assessment of the global economic environment. When things are going well, there is no need to prop up the dollar, but when energy concerns start to impact the economy, policy decisions that support the dollar start to make sense.