Why Gold’s Inevitable Rise Is the Investor’s Safe Haven, Case Study Example

The correlation between the price of oil, gold and the USdollar will be explored in this research paper.  The equilibrium point, demand price and supply price of gold will be explored in two graphs.  It will be explored in a graph that reviews the price of oil, gold and the US dollarfromMarch 2005 to March 2015.  Another graph will be explored that gauges the price of oil, gold and the value of the US dollar from July 16 – October 16, 2014.  The final graph that will be explored is the production of energy that has occurred with each real dollar valued at 2005 rates with regards to the decline of energy production per GDP dollar.  The perspectives of   Barisheff (2013), El- Gamal and Jaffe (2010), Holmes (2014), Lydon (2010), Macrotrends (2014) and Perry (2012) will be explored in this research paper.

The United States’ economy has been able to capitalize on low cost fossil fuel derived energy for almost one hundred years.  This is one of the main characteristics of the United States economy in the twentieth and the twenty first century.  There are 317,000,000 inhabitants in the United States thatcompose only 5% of the global population and consume more than 25% percent of the global oil supplies.  The United States imports approximately 75% of its energy and maintains approximately 2% of the global oil reserves. As an outcome of the dependency that is present between the foreign fossil fuel suppliers and its dependency on fossil fuels, any price increases or disruption that occurs in the petroleum supply chain of the United States will adversely influence the United States’ economy to a greater extent than any other country on the Earth (Barisheff, 2013; El- Gamal and Jaffe, 2010; Lydon, 2010).

The correlation that exist between the dollar gold and the price of oil corresponds to the desire of the Arab oilproducingnations desire to be compensated with gold for their fossil fuels.  This desire is dated with the Monarch of Saudi Arabia, King Ibn Saudrequesting payment in gold for the initial oil productionplants in Saudi Arabia.  The Islamic law prohibits the receipt of a promise of payment of dollars as a unit of monetary exchange.  There is an increasing discord among the religious fundamentalists with regards to the exchange of US dollars for petroleum.  The price of commodities, gold and oil has been valued in dollars for the past forty years.  This occurred when the oil producing nationsconcurred to sell their oil only for United States dollar (Barisheff, 2013; El- Gamal and Jaffe, 2010; Lydon, 2010).

Presently, aside from the geopolitical perils in the oil producing nations, the supply and demand imbalances that are received from Peak oil and the augmenting demand for fossil fuels from the developing nations, the prices of oil and gold can be anticipated to increase as the value of the dollar declines.  Considering that the money supply has been expanding, the international debt is increasing; the US dollar is more than probable to continue the decreasing trend that instated in 2001 with regards to its value in comparison to gold and oil.  The longterm tendency is there is a negative relationship that exists between the valueof oil and gold in relation to the US dollar.  Each day that the dollar experiences a decrease has the outcome of an increase forgold and oil (Barisheff, 2013; El- Gamal and Jaffe, 2010; Lydon, 2010).

The increasing oil prices have been a primary obstacle for the United States dollar over the past forty years.  The price of gold recently reached a trough or a supply price and the price of oil simultaneously reached a demand price.  These changes took place last month.  Peak oil almost reached $110 per barrel and the trough gold reached $1190 per ounce.  The dollar index changed from 86.5 in July to 80.5 in October.  As the dollar is declining the production of energy in BTU has been decreasingsteadily over the past forty years.  The production of energy foreach dollar that was valued at 2005 prices was almost 16 thousand BTU in 1973.  This estimate has decreased to 7.3 thousands BTU per dollar in 2012.  This is a devaluation of half ofthe energy production (Barisheff, 2013; El- Gamal and Jaffe, 2010; Lydon, 2010; Perry, 2012).

Research demonstrates that China has consumed a large part of the global commodities in order to produce a tenth of the global GDP.  China has beenconsuming over a third ofthe global commodity inputs during the year of 2010.  The Chinese oil consumption increased 92% in the decade of 2000 to 2010.  This correlated with an increase of more that 240 % in the price of petroleum.  It is very interesting to review these facts with regards to an emerging country that has an economy that has become reliant on fixed asset investments in order to sustain its growth.  China may come to demand less oil in the next five years period and this decreased consumption may have a substantial influence on the margin price of oil.  Nations that include Russia and Brazil are reliant on a high sustained price of oil in order to maintain their prosperity (Barisheff, 2013; El- Gamal and Jaffe, 2010; Holmes, 2014; Lydon, 2010).

Conclusion

The demand price for oil is based on consumption. At the present, the peak oil is at over $100 per barrel.  This can be attributed to the elevated demand for oil that has been created by nations that include China and India in order to sustain development.  As the price of oil increases the demand for oil will lower. As the price of gold decreases, the demand for gold will increase. As the value of the dollar decreases, the demand for the USdollar will increase.

References

Barisheff, N. (2013). $10,000 gold: Why gold’s inevitable rise is the investor’s safe haven. Mississauga, Ontario: John Wiley and Sons Canada Ltd.

Holmes, F. (22 October 2014). Here’s what a strong dollar does to gold and oil prices. Business Insider.

Lydon, T. (2010). Investing in gold and oil. Upper Saddle River, NJ: Financial Times Press.

Macrotrends (2014). Dollar, gold and oil chart. Macrotrends.

Perry, M.J. (2 April 2012). 2011: Most energy efficient economy in history.  Carpe Diem.