Sunday, May 09, 2010

Oil And Gold Do Mix

Right now gas is selling for $3.03/gal at the station down the street from me and at a lot of other places in the County. We shake our heads and complain about the price and blame the Arabs/politicians/oil companies and every other greedy so and so in the book.

Here is a different take on the matter from Real Clear Markets:

... it's worth mentioning that not long after he was inaugurated as our 40th president, Ronald Reagan predicted a fall in the price of a barrel of oil. What made Reagan so confident?

Aware of the historical relationship between gold and oil, Reagan deduced that oil was due for a correction based on a 20% drop in the price of an ounce of gold since his election. Sure enough, by December of 1981 the price of a barrel of oil was nearly 20% lower than it had been one year before.

Looked at over a longer timeframe, from 1970 to 1981 the price of gold rose 1,219 percent, versus a rise in the price of oil 1,291 percent. This wasn't coincidental. With gold and oil both priced in dollars, and with gold serving as the best proxy for the latter's value, a jump in the gold price neatly foretold the oil "shocks" of the 1970s that were merely dollar shocks.

Follow the money. As the dollar went south, the price of oil went north.
Kinda makes sense. no?

Right now gold trades in the $1176 range, and the price of oil is roughly $79 per barrel. That an ounce of gold buys 15 barrels of oil signals yet again that the real price of oil has hardly changed at all over the last 10 years of allegedly costly crude. Still, $79 oil ensures $3/gallon gasoline as far as the eye can see, and it's a fair bet that the price will stay there so long as gold continues to test all-time highs.

The good news, however, is that this can be fixed. As evidenced by the dollar's major decline versus gold this decade, the dollar is very cheap. The dollar's debased nature explains expensive spot oil prices, high prices at the pump, and most important of all, it helps explain a difficult job outlook. With so much soggy money flowing into commodities least vulnerable to dollar weakness, the entrepreneurial economy where most jobs are created is losing out.

I can remember when gold was $35 an ounce:
A first classs postage stamp sold for 3 cents
I could buy chuck steak for 59 cents a pound.
A gallon of milk was 69 cents.
In 1971 I worked at a gas station where the most common fuel purchase was for $3 - it bought you nine gallons of gas and free silverware.
I attended an expensive private university for $800 tuition/semester (1967).
You could buy a nice little ranch style house for $15,000.
For now though, it's a waste of time to bemoan what many deem "expensive oil." Time is wasted because there's no such thing as expensive oil, and there never has been. Instead, we have a problem of Americans supposing that the dollar is fixed in value, when in fact the dollar floats.
Oil hasn't become expensive this decade; rather the dollar has become very cheap. Strengthen the dollar, and worries over nosebleed gasoline prices will quickly become a thing of the past. Absent that, to hope that something will become inexpensive when the unit of account in which it's priced continues to fall is to indulge in fantasy.
So the question now is, why is the dollar fallen into such deep kimchi? I suspect the gubbmint. Mandated gimme programs for the "disadvantaged" have dollars being taken away (taxes) from people who are capable of managing their affairs and given to people who are not capable of holding onto a nickel. The housing bubble was caused in this very fashion. People with marginal or no jobs at all were given loans to purchase homes which they otherwise could not afford and either way were incapable of maintaining. Too many dollars chasing after a finite number of items will artificially raise the price of those items and simultaneously debase the value of your currency.

The Bible states that the love of money is the cause of much evil (1 Tim 6:10). The love of government does the same thing for the same reason.


Unknown said...

The cost of living has been rising at a greater rate than average income for about 40 years. This is why women must work.

sig94 said...

I also wonder about what people spend their money on. So many families spend lots of dough on non-necessities. I say this because my wife stopped working for ten years and stayed home with the kids. And she had a better paying job than mine at the time. It was a definate hardship but we did it and we're both glad. So are the kids.

SoCalOilMan said...

Working in the oil industry, believe me I've heard about the "price of oil/gas" for 35 years now.

My Dad made $20K back in 1956 and bought a house, supported two kids and a wife. I make 3 X's that and...well, I ain't broke, but there isn't a lot left over even though my kid's out of the nest and I'm separated from my wife.

Nobody seems to be able to recognize that the dollar ain't worth much now.

An example I always like is the "HIGHEST GROSSING MOVIE" dollars it's some thing where they charge $15 a ticket...well that's great, but when I started going to movies it cost $1.35 for TWO movies.

Convert and adjust, and "Cleopatra" or "Gone with the Wind" will blow the socks off of any "high grosser" today.

commoncents said...

Thank You for posting this! I really like your blog!!

Common Cents

ps. Link Exchange??

sig94 said...