Tuesday, April 11, 2006

Who Put the Bull Back in Bullion?

I loves me some gold. I don’t own any and I would never invest in it but I love it. But not even love can conjure up a greater range of feelings in people on shorter notice than Gold.

Since the shiny yellow stuff broke an important barrier this morning closing at $600 maybe we should try to get a handle on what its recent rise in value means without getting into gold-foil hat territory. This is all guessing game stuff, of course. Gold has both risen and fallen during times of fiscal toughness and vice versa and everything in between.

And we don’t even care about gold…we care about dollars…and increasingly we care about the increasingly painful experience of putting them in our gas tanks.

But gold’s like the tarot for me or reading horoscopes or Freudian dream theory, there’s something primal about the first stuff we adopted to mean portable wealth after we gave up counting it in heads of cattle. As anybody can see, though, we may have taken the gold out of the herd but…well, you know.

Although gold’s been marginalized by oil and the dollar, there is something deep in our psyche that makes us reach out for it when we’re feeling threatened and insecure about all the other things that go into our pockets and onto our tax returns. If you’ve got better things to do with your money you don’t buy gold. When you lose faith in the modern instruments of wealth and exchange, however, the old mystic properties start sounding better and better.

To talk about today’s close means talking a little about the short modern history of gold. FDR made it illegal for US citizens to own bullion in ’33 but foreign nations could still redeem any currency they held for what was then the real deal.

That is until the Vietnam war and some pretty startling fiscal imprudence under the Nixon administration. As the US began to really pump out paper money to cover a multitude of sins, countries holding large amounts of greenbacks started to take advantage of the old deal of gold for paper. Ft. Knox got very nervous very quick. Dick Nixon and Henry the K took the dollar completely off the gold standard in ’71. The dollar floated and gold became the commodity it is today.

Talk about takin’ the bull out of bullion! But let’s not get crazy. The almighty dollar fell a bit but it didn’t become just another pound, mark, franc, yen or peso. Unlike those “lesser” currencies, there were still mountains of dollars all over the world in every bank in every country and because of that it was just plain easier to conduct international business in greenbacks.

Even during the oil shocks of the early 70’s OPEC still billed the world in dollars…it was just easier that way. That did good things for the new gold-less dollar because the rest of the world was now spending 400% more of them on their biggest national purchase: energy. At the same time that Americans were donating their new ’73 Coupe de Villes to the Salvation Army the new big-time oil prices were unexpectedly helping the dollar: for a while all those excess dollars were being vacuumed out of national treasuries all over the globe.

That got Henry to thinkin’: high oil prices might not be so bad, these prices are bringing the dollar back up!

Then it flipped back. Major industrialized countries began to protect their shrinking reserves of the now more valuable dollars and started trying to get OPEC to accept different currencies for oil purchases. No way, says the K.

You can find any opinion you want about exactly how Kissinger put a stop to the idea that nations could buy oil with anything other than the dollar…but they all involve something along the lines of intimidation and something about the Shah of Iran. Let’s leave it at that. Except, of course, that the Shah fell in ’79 and gold shot to almost $900 as a result.

Yep. Almost $900 an ounce.

This $600 figure you’re hearing about comes from when the cost of bling was heading way back down into “sane” territory and the Kissinger’s dream of a “petrodollar” was assured…for now.

Tomorrow: “What’s a Petrodollar?”


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