Monday June 20, 2005 - 12:20:53 GMT
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Black Swan Capital - www.blackswantrading.com
Gold and oil: A dollar story?
“Throughout history, financial bubbles—whether in housing, equities or tulip bulbs—have continued to inflate for longer than rational folk believed possible.”
If we consider gold a store of global purchasing power, and if the cost of oil is rising in terms of gold (measured by the number of ounces of gold it takes to purchase one barrel of oil), the cost to keep the global industrial engine is rising quickly. Is it a logical extension from here to a strong dollar? We attempt to make that leap in today’s piece.
The key price factor for global production—oil—is rising sharply for everyone. And because crude oil is priced in dollars, and the relative value of the dollar is rising, the cost to purchase oil in local currency is rising even faster than the $ price implies.
In a normal world, one where China is not sucking the air from every manufacturer across the rest of the globe, these costs would be passed on to Mr. Consumer in the form of higher prices. But, in this brave new world, with a glut of manufacturing capacity, raising final goods prices, at least in the minds of most executives, means a loss of market share.
Rising energy costs are bad news business. But, it’s palatable if consumer demand is decent. Presently, the US is one of the few places where decent consumer demand still exists—and that we are told is built on a house of cards—literally. But that’s another story altogether.
So, what is a central banker to do when industrial production is squeezed and demand is stagnant? According to the central banker playbook—put more money in the hands of consumers to stimulate their demand and debase the external value of the currency in order to stimulate exports. The problem is: we have several central bankers calling for the same play.
The upshot: It could mean the dollar price of gold AND the exchange value of the dollar continues to rise at the same time. The logic being the Fed doesn’t debase the dollar as fast as its competitors because the US economy remains the strongest engine of global demand; and because the Fed sees itself as the world’s central banker. As the world’s banker, the Fed realizes a rising dollar buys more imports, and helps relieve the pressure on global manufacturers looking for a customer.
Thus, we may be entering an area where the so-called global imbalances are best alleviated by a RISIGN dollar—not a falling dollar, as we have been told many times, by many pundits before.
In other words, we could be lurching into a VIRTUOUS CIRCLE in the US dollar for good reason. We have the setup of strong monetary policy with loose fiscal policy. Thus, the George Soros quote from Currency Currents on 6 Jun ’05:
“The strong dollar attracted imports, which helped to satisfy excess demand and to keep down the price level. A self-reinforcing process was set into motion in which a strong economy, strong currency, a large budget deficit, and a large trade deficit mutually reinforced each other to produce non-inflationary growth.”
I know it’s a stretch, but another thing I know is never say never when it comes to financial markets.
Black Swan Capital
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