Hardly he says – we can imagine a few will do a double take on our assertion there.
But after reading a piece in Forbes Magazine and thinking about the precious metals we’re involved with day in, day out, it makes complete sense.
Anyone knows that gas is expensive. Any rise in price is noticed but it’s especially noticed when it seems to just keep going. Political figures and analysts scramble to try and explain the increase – many point to the Middle East as the cause while others point to growing demand in China and India.
But after examining historical trends and comparing the price of oil to gold, we find that oil and gas is actually below its historical average of the last 40 or so years.
First for a little background – prices are simply ratios. Take for example a barrel of West Texas Intermediate crude oil, which as of last week was around $106 per barrel. This essentially means that the market value of a barrel of oil is 106 times the market value of one U.S. dollar.
The price that truly matters is the price of oil in gold, which currently stands at 0.0602 ounces of gold per barrel. Right now, a barrel of oil has the same market value as 0.0602 ounces of gold.
Since 1971, oil has averaged 0.0732 ounces of gold per barrel, meaning that current oil prices in gold are below their 40-year historic average. To meet the average, crude prices would need to rise by 22% to approximately $129 per barrel – assuming, of course, that gold stays at its current levels.
Such an increase in terms of gold would equate to around a $0.65 to $0.75 increase at the gas pump.
Therefore, just because gas prices are rising doesn’t necessarily mean the price (…or value) of oil is higher. Taking a quick look at some charts and just noticing prices on the pump when driving around, we’ve certainly noticed a strong correlation between gold and oil prices.
Of course, any further instability in the Middle East could make oil prices really go up.
But for the present, much of the rise in oil and gas prices can be attributed to a dollar that’s declining in value. When the value of a dollar was defined in terms of gold (…$35/oz) in the early 1970s, crude was selling for less than $4/barrel.
Once this partial gold standard was abandoned, both gold and oil prices rose dramatically. In response to this, policymakers at the time pursued a course that brought about shortages and an era of what came to be known as stagflation – higher inflation coupled with low, or no economic growth.
Besides the threat of high oil prices to family budgets and economic activity, it is also possible that higher pump prices could bring about these shortages again. Some ideas being considered to combat high gas prices include additional cuts in the payroll tax and higher taxes on energy producers.
From this analysis of something as common as gas and energy, it’s easy for us to see why we consider gold the “golden constant.” Unfortunately, these points get lost in the maze of explanations out there, which is why we wanted to point it out here.
So next time you’re around the water cooler and the co-workers are talking about the higher pump prices, be sure to point out the correlation between gold and oil prices, which will certainly pique their interest in gold bullion as a way to protect themselves from these conditions.
Image: DigitalArt/ FreeDigitalPhotos.net
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