Gold and Oil: Are They Real Money Measuring Real Value?
Source: Julian D.W. Phillips, Gold Forecaster - Global Watch (8/17/07)
In the face of gyrating currency markets it is difficult to get a real “price” on anything at the moment. We have often asked the question here, what is the price of gold? If it is $670 then we ask, what is the price of the $. Should the $ be valued in gold, the other way round to now? Well the same question should now be asked of oil.
Three years ago the oil producers were happy with an oil price of $35, then last year with $60 and now the indication are that they are happy with $70, because the global economy is still growing with oil at that price. This is the criteria they set and they ignore any demand side definition of price.
The buying power of oil is not the criteria, it is how high can the price go without hurting global growth. This makes oil a definition of money, a measure of the value of the $ in market measurement terms. In doing this oil has taken an important step in defining 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 [interest] achievable, is going out the door.
Yes, O.P.E.C. did turn on the supply when the market faced real shortages, but only to show good faith in providing sufficient oil to avoid unnatural shortages and damage the need for oil in the global economy.
This does not make oil money, for it does not meet the popular measures of money [durable, a luxury, divisible and portable]. Yes, it meets some, which enable it to take this position. It does so on a world-wide front simply because we have arrived at a position where O.P.E.C. firmly controls the market in oil and will do so long as it is supply dominated.
q Gold retains this 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.
q 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 its 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: -
While we have to accept payment in the U.S. $ we are fully aware of its falling buying power and will ensure that the oil price will rise to compensate that fall.
q It is a very strong statement to make and demonstrates O.P.E.C.’s full control over its income from oil.
q We now have to recognize that they are focusing not on the receipt of the best currency [€?], but are being pragmatic in accepting the $ for what it is, but defining its value on an ongoing basis, by letting the price rise and ensuring that the paper obligations of governments [all currencies] are measurable in terms of oil [the $ in particular].
q The reality of this is that oil now measures value better than the $ and will do so 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 $, in terms of the globe’s confidence in it. We cover the credit squeeze and the investment climate from now onwar