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Page added on November 28, 2009

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High Gold Prices: It's the Oil, Stupid

I’m constantly amazed at the inability of US economic and financial “expert policymakers” to understand the true reason behind gold’s big move: OIL. The inflation adjusted high for gold was set in January 1980 at $2,290 an ounce. It is not a coincidence this high was set just after the oil crisis of the 1970s. The US was lucky then: it had Paul Volcker at the Federal Reserve and it had the oil reserves of Alaska and the North Sea coming online. The combination of Volcker’s high interest rates and new domestic oil supplies saved the day. Unfortunately, neither of these two solutions will bail America out this time. Once again, as history repeats itself, gold prices are taking off after the 2008 oil crisis which saw oil prices of $145/barrel. Why is it so hard for the Harvard B-School “experts” and the pundits on CNBC to understand this very simple cause and effect?

US policymakers seem intent on devaluing the US dollar to improve the trade deficit. I’m just an engineer, but I wish one of these expert economists would explain to me how this currency devaluation “strategy” will work since:

  • oil is the biggest component of the US trade deficit
  • oil is priced in US dollars and therefore
  • the price of oil rises as the value of the dollar falls

This is so obvious, yet the “experts” at the Federal Reserve, Treasury, and in the White House seem completely oblivious to this fundamental and inconvenient truth. Either they are oblivious or there are conspiracies afoot to ignore the truth about the country’s dependence on foreign oil. Is this because they’re in the pockets of big oil? Because they want to make the military happy by fighting foreign oil wars? Both? Your guess is as good as mine. Regardless, not solving its dependence on foreign oil is destroying America’s currency and economy. If not solved, it will eventually destroy its Democracy as well.

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