Oil for Gold
by Jim Davies, 2/2/2012
Something odd happened to the US Dollar, on its way into the second half of January; against all major currencies, its exchange rate reversed direction. Here's its value against the Euro:
For four months it had risen by 10%; that is, you could buy $1 for 0.71 last August, but by mid-January you'd need 0.78. Then, all of a sudden, it topped and fell. Why?
It fell for a while in October also, and such questions are so profound as often to defy explanation; but this month there may be one. In late 2011 every other government currency - especially the - was in free fall because of the profligacy of European governments, so any big player wanting to hold cash had little choice; the dollar was the least unattractive option. So it gained value rather steeply; 10% in 4 months is a rate of 33% a year. But in mid-January the news broke that the Indian government had made a deal to buy Iranian oil for gold.
This followed the increasingly tight sanctions the US government and friends have placed on the Iranian one, on the pretext of wanting to prevent it producing a nuclear bomb. With dollar assets frozen, Iran had to find a way to sell its oil for some other form of money. I hear there are similar talks going on with China. Now, if oil begins to get traded for gold, the implications are huge.
First, the dollar price of gold will rise steeply. It already did; in the week following this news, it sprinted up from $1600 to $1700 an ounce. No ceiling is in sight.
Second, if oil is traded for gold, why not everything else; that is, one possible outcome here would be a worldwide gold currency. That would be a gold standard rather than true free-market money such as will prevail in the coming ZGS, but being based on gold, it will still be a heap better than the worthless papers prevailing now.
Third, the 40-year-old rôle of the US Dollar as the "reserve currency" of the world, in which capacity all oil sales are paid for with bits of paper printed in D.C., will come to and end. That means there will be much less demand for dollars. That means its value will tumble, relative to other governments' paper. That means life here is about to get a whole lot more expensive. That "reserve" status of the $ has bought us a great deal of false prosperity for the last half century; instead of having to work for it, Americans have just let the Fed print up some more.
Fourth, the Feds won't like that change, and are likely to lash out to try to stop it. The last time it happened was 11 years ago, and the maverick was Saddam Hussein. Guess what happened next. The India-Iran deal could now become the Fed's excuse for starting another war.
That causes one to wonder which came first. Are the Feds so hell-bent on another war that they tightened the sanction screws on Iran in order to provoke an oil-for-gold deal in order to have a cassus belli? Or did they impose sanctions just in order to dissuade Iran from switching out of the dollar? - the answer is clear, for the sanctions have been steadily increasing for several years; they definitely came first, and caused or triggered the Indian deal.
Oh, by the way: where exactly does the Indian government store its gold? - not, I trust, in any vault whose key is held by a friend of the FedGov. Otherwise the war could rather quickly go global.
The intriguing question for me is whether Obama (the apostle of hope, change and mid-East disengagement, remember?) will really start another war in this election year. If he does, without destroying his chances of a second term, he will have to use spin worthy of Macchiavelli. Or Goebbels.
Perhaps, though, he will back down. Last weekend I was surprised to learn that a set of nuclear power inspectors had descended on Teheran, supposedly to discover any bomb-makers. That's obviously silly; they have a few days to prove a negative, in a large country. Can't be done, therefore their real mission was something different. I'm guessing it was just a charade; they will come out and announce that after all, Iran has no bomb in preparation, we so certify; and then the sanctions can be relaxed and oil will once again be sold only for paper dollars. Hey, it's better than WW-III. Stay tuned.