-Caveat Lector-
Comrades: DOES THIS MEAN WE SHOULD BUY GOLD? "Will they take food stamps?
www.gold-eagle.com/editorials_00/hickel092900.html
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Can Iraq's Policy Affect the US$ and Euro?
Iraq decided to no longer accept dollars for oil... what do you think will
be the effect on the greenback and on the Euro?"
The burning question in cyber-space today is "Will this policy be limited to
just Iraq?"
In my opinion, we will see the dollar having to bid for Euro's instead of
oil directly. That will reverse the current Euro-Dollar relationship. It
will create a high demand for Euro's causing a higher Euro valuation; the
dollar will significantly devalue against the Euro by 30% or more. Also,
since the Euro is market-aligned with gold, which represents 15% of its
current value, the price of gold will also rise in dollars and Euro's, but
much more so in dollars -- probably above $600+ per ounce or more. As gold
changes in value, so too will the Euro. Gold will become a proportionately
higher (or lower, since gold is marked to market value against the Euro
quarterly) percentage of backing for the Euro as gold rises (or lowers).
The current Goldgate derivatives fiasco in paper gold contracts (see
www.gata.org) has the potential to blow the roof off of the gold price. Were
that to happen, the Euro, because of its market tie-in with gold prices and
low external debt, would find itself strongly backed by gold and when marked
to the market price of gold would strongly devalue the dollar to a
potentially devastating 50% or less of its current value. Combining these
two factors, you have a replacement world reserve currency in the making.
It is possible that other oil countries could follow Iraq's lead by allowing
payment in Dollars or Euro's for oil. This dual payment system would, of
course, be too attractive for European countries to pass up and would
therefore open the door to significant dollar holdings being converted to
Euro's. Eventually, this would lead to the Euro as becoming the preferred
choice in oil payment currency because the currency value is earmarked to
gold's market value and would represent a less inflationary and stronger
long-term value to the oil interests.
All the pieces would seem to be in place for this seemingly minor payment
acceptance decision, yet the impact on the Euro, gold, oil, and dollar
prices would rock the world. It would cause a rush to the exits away from
the dollar to the Euro. No wonder, then, the Bank of England, the ESF, and
bullion banks want to keep a lid on the price of gold (see GATA link above).
For a significant rise in the price of gold or oil in dollar terms would
only tend to exacerbate this significant shift in currencies -- it would
become just too good (for oil interests) to pass up.
This would also reverse the trade deficit for the US, as a devalued currency
would make US-made products much more attractive in world Euro-based
markets. Its effects in the US would be to cause a rush to Euro-based
investments and obviously cause the US stock market bubble to create a
whooshing sound as dollars are moved into Euro-based stock markets and
precious metals too. Just look currently at how the recent Intel and Kodak
profit announcements have effected the higher Price/Earning ratios of these
two companies -- a one-hour 30% downward adjustment. The US equity markets
are just too high in their average P/E's and we would see a quick erosion of
the average PE to a more traditional and conservative level but not before
an overswing occurred in the opposite direction. It is easy to see why the
US has held a strong-dollar policy and would appear to be pulling the stops
out in order to protect that policy.
It is gold's hidden agenda as a currency that has caused the gold investors
plight of late. [It is true -- all currencies are based on the price of
gold, especially the dollar (and now the Euro). This is not a G7 official
position but one would have to lack intelligence to not see the relationship
gold holds with all world currencies. It is the only commodity held in
quantity by world central banks -- 32,000 tons to be more precise. This
reservoir of gold is much like a holding tank or overflow tank in a closed
liquid system with big leaks. The banks can use their stash to stabilize the
system until the loss of gold is too rapid and the system needs more gold
because the reservoir can't (or won't) keep up -- such is the case today].
The dollar-based countries (either by backing or by trade) have had to
protect the dollar by holding back the price of gold, especially since the
Euro is market bound to gold. Any strong rise in the price of gold would
make the Euro a very strong and desirable currency. It seems that this chess
match is much too far along and the dollar is now trapped in playing it
until the end, but has lost far too many pieces and is now in a defensive
game with apparently no way out.
When looked at in this perspective, one cannot blame the dollar camp for its
strong dollar policy and all the alleged manipulations and shenanigans in
the gold market -- the soft landing of the stock market seems to be but a
small piece of a larger looming landslide of derived-dollar problems as they
pertain to gold and to a strong competitive currency: the Euro. A strong
dollar and a gold price above $290 cannot exist in the same Universe, much
like the famed question and answer in the "Hitchhiker's Guide to the Galaxy"
series by Douglas Adams. As in the series, should the question and answer or
in this case, strong gold and strong dollar, find themselves in the same
Universe, this would cause major havoc. It is an impossible formula and no
matter how much a goldbug or Euro-watcher would want it, one or the other
must give first. For now, gold is loosing the battle. Yet, the mere
existence of a Euro currency backed by 11-strong nations, creates a major
conduit for funds that seems quite compelling for oil sellers and
purchasers. A dual oil payment system is such an easy policy change to make,
but one with major ramifications. When looked at in this perspective, one
must admire (but not necessarily like) the beauty of moves that has brought
us to here. Like it or not, it sure does explain a whole lot, eh?
Steve Hickel
29 September 2000
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