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November 04, 2007

Gold, US Dollar and Oil: Markets Simply REFLECT On Collective Policies Imposed!
by Benson Te

Another week, another record.

As the US dollar index fell to its lowest level ever, Crude oil and gold hit record milestones, a historical high and a new 27 year high, respectively.

While everybody can see prices, only a few realize that they have a common denominator and transmit a message.

The market for crude oil can't be exactly characterized as FREE, as about 77% of the world's 1.1 trillion barrels in proven oil reserves is controlled by governments (Washington post). And so as with the US dollar Index, where collective governments monopolize the role of money creation. In short, in a demand supply equation, the supply side of these markets is mostly controlled by governments, whereas the demand side is one that is being rated in the markets.

Take oil, the problem from the supply side stemmed from years of non-transparency practices, subsidies, nationalization, cheating among cartel members, environmental restrictions, fund diversion to social programs, underinvestment, and others -- all of which has the distorted price signals in the marketplace which lent to complacency and therefore today's massive disequilibrium which has now been reflected in prices.

On the demand side, both the currency market and oil markets reflect the effects of the inflationary policies (money and credit creation) instituted during the earlier years.

As for gold, which has served as a better part of global money for more than 2,500 years, the earliest coinage was said to have been in Lydia between 660 and 643 BC (wikipedia.org), it simply echoes on the collective malpractices of governments in inflating the system with excess money under today's Paper Money standard.

Everybody sees gold rise in terms of US dollars, but this hasn't been the case, gold has been rising against ALL currencies, including the best performing Canadian Loonie, as shown in the chart below.

Figure 1: stockcharts.com: Gold's Outperformance!

The US dollar index basket consists of 6 currencies which are weighted in different scales, namely the Euro (57.6%), Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%), and the Swiss Franc (3.6%).

With the Japanese Yen and the Swiss Franc functioning as funding currencies in today's Carry Trade, it is obvious that gold's rise has had far greater impact than the rest, so we purposely didn't include them.

As you can see even against the Euro (lowest pane), which represents over half of the US dollar index, and has been gaining quite steeply vis-à-vis the US dollar, gold's ascent has been conspicuous, and so with the British Pound (pane below main window).

Commodity currencies which benefit from the rise of exports of commodities such as the Australian dollar (middle pane) and the best performing Canadian Loonie (main window) are likewise underperforming gold.

Mind you, while the chart speaks of a one year frame, this phenomenon has been ongoing for several years.

Now instead of quoting other known figures, we purposely quote the favorite of statist practitioners, the illustrious John Maynard Keynes, "By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens." Our point is, Mr. Keynes clearly understands the implications of inflation, why can't their followers?

Yes, it's funny how mainstream media including their cohorts of experts don't tell you this. They focus on other aspects, the tangential aspects of economic ills...so as to generate support for MORE spending programs in the name of public welfare -- More inflation! Hahaha!...when in fact inflationary policies or the COST OF SOCIAL PROGRAMS or Government INTERVENTIONS have been basically the principal reason why our collective purchasing power has been eroding and widening the so-called "inequality" effect (which is actually a mirage since inequality is an undeniable fact of life!), a topic well-loved by demagogues and easily bought by the gullible public.

Look at these comments (telegraph) "We are of course concerned about high oil prices, but the market is increasingly driven by forces beyond Opec's control." Mohammed bin Dhaen al-Hamli, president of Opec and "Please don't blame us for $93 oil... The market is out of control." He said that the oil market is "very confused", Qatar's Abdullah al-Attiyah oil minister. (highlight mine). How pathetic!

What this means? Governments have done ALL it can through the years to "manage" or "control" prices of oil, the issuance of paper money and even gold.

It is even alleged that the gold market has been sold short by western governments to limit the impact of the public's inflation expectations, where a group called Gold Anti-Trust Committee (www.gata.org) has long spearheaded the campaign to expose the collective government's manipulation.

Needless to say, despite all the "control and command features" imposed on the markets, these actions eventually BACKFIRE! The Law of Unintended Consequences, anyone?

If it is TRUE that gold has been shorted, then high 4-digit to even 5-digit gold is not improbable where $100+ fluctuations per day become a reality.

$150 oil backed by Peak oil syndrome is now clearly on horizon. Texas oilman T. Boone Pickens (hedgefund.net), whose streak has been on a roll, just recently predicted the price of oil will probably reach $100 before falling to $80 where he theorized that "peak oil," the point at which oil production worldwide has reached its zenith, has arrived. After its peak, production will begin an unstoppable decline." Looks like we are heading there!

As governments turn to rescue their factotums and conduits, watch the inflation genie morph into a hideous Godzilla.

Because of the angst of the SYMPTOMS of inflation (high prices) more and more pressures will be applied to governments to undertake political "safety nets" programs to mitigate the impact on the populace. Argentina, Russia and China have initiated some semblance of price controls. Says Daniel Gross of Slate Magazine, "If the price controls continue much longer, these economies could see the revival of another distressing factor that defined socialist economies in the 20th century: rationing." So aside from MORE price distortions we are seeing MORE inflationary policies again! Inflation in itself a self-reinforcing dynamic!

Alas, the world's financial system is clearly undergoing an incredible stress. And the Austrians School have been dead on with their projections; either we see a destruction of the paper currency or face up to a Depression that would make the US 1930s and Japan's lost decade look like a picnic.

Markets simply REFLECT on the collective policies imposed, or as the bible says what we sow, we reap. Markets don't fail, Governments do.

People see what they want to see, but refuse to see what needs to be seen. In the end we all fall victim to our biases, where some of us blame others instead.

benson.te@gmail.com
prudentinvestornewsletters.blogspot.com/

Bensen Te is an independent writer-analyst of the Philippine Stock Market, and writes weekly newsletters for clients and friends.

Copyright © 2003-2006 Benson Te

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