GOLD & OIL - Relative Values
Co-authored by
Frank Batten & Jack Weber
To evaluate the cost of an item during a time of falling currency values, one must establish a beginning point -- hopefully in an objective way. To accomplish that, one must try to find a time when a condition of equilibrium existed, when all parties were satisfied with the price relationships between the products under consideration.
We have picked 1933/34 as such a starting point, for the following reasons:
- The US dollar was gold backed and worth 100 cents.
- Gold was revalued to $35/ounce, and
- Oil was valued at approximately $1.50/barrel
At that time, a state of equilibrium existed, and everyone was content with the relative values of these two commodities. Some who have written on this subject have chosen 1940 or 1950 as their beginning point, but these dates are flawed due to the fact that the US dollar was no longer worth 100 cents, having fallen drastically from the 1933/34 level. This was due to the US raising of the "official" gold price of $20.67 to $31.26 on 10/22/33 and the subsequent change from $31.26 to $35 on 1/30/34. By using the 1934-dollar value, one ounce of gold bought approximately 23 barrels of crude oil (and a higher quality crude, at that).
In purchasing power, the 1933/34 US dollar is now worth about 3 cents and losing ground rapidly relative to commodities and other currencies. (Even the lowly 3-cent postage stamp of our youth now costs 39 cents - that's a 1300% increase!) Today's 3-cent dollar equates to oil at approximately $50/barrel, even with spot crude at $60. The current spot price of gold is about $525, which buys 8.5 barrels of oil. The salient point is: oil is no longer bought with gold (that may change sooner than most people think), but with paper, psuedo, or fiat "money." To equate today's oil price to gold, measured by a rubber yardstick (paper money) is a mistake. A return to a state of equilibrium regarding oil, gold and money, a rigid yardstick must be, and ultimately will be, used, to the exclusion of psuedo-money.
To receive just 8.5 barrels of oil for an ounce of gold at $525/oz suggests something is considerably out of balance, historically. That "something" is the fact that heaven and hell has been moved to separate gold from the oil price. At today's artificial gold price, massively manipulated by the US Federal Reserve/Treasury/Wall Street, the price equilibrium of gold/oil will be impossible to maintain much longer. Only at a much higher gold price can the historic linkage between gold and oil be reestablished, as it surely will be. Unbacked paper currencies are dying worldwide, but gold is not dying anywhere. It has simply been subjected to a facade of price manipulation.
At $525/oz, there isn't enough gold in existence to pay for all the oil that is demanded by industrial and consumer consumption. There are no oil producing nations in existence who would not choose gold over paper in payment for oil. At $525, no gold owner will use it to buy oil - none! Using the objective/subjective historical equilibrium relationship of gold and oil of 23 barrels per ounce of gold, the current price of gold versus oil would/should be $1,400 per ounce! And to make the point even clearer, if there were a nation willing to pay for oil exclusively with gold, it would be offered upwards of 23 barrels of oil per ounce of gold ($1,400/ounce divided by 23 barrels per ounce = $60/barrel), and in our considered opinion, 50 barrels per ounce would not be an impossibility.
Yes, we are quite familiar with the oil supply, "peak oil" thesis, some of which is true, but much of it is untrue. Since 1933, the oil application-usage has been massive and discovery of new deposits has also been massive, actually being equal or greater. For this fact, we rely on the Chief Economist of the American Petroleum Institute, which represents the massive oil industry in the US. Based on his statements, the "peak oil" thesis mouthed by some who should know better, is a fraud.
It seems that the gold production since the equilibrium years of 1933/34 has been a lesser percentage than that of oil. Gold is the ultimate means of payment (the ultimate money); always has been, always will be. The gold/oil linkage will always exist despite lapses into foolishness from time to time. Federal Reserve Notes are not "money" any more than Cow chips are. At today's gold price in paper, gold is currently selling for less than one-half its equilibrium price of $1,165/oz. Another way of calculating this is that, in 1933 dollars, gold can be bought for $15.75/oz ($525 x .03). In our opinion, that won't be true much longer!
Worldwide, the total above ground tonnage of gold is estimated to be 150,000 (or about 3.5 billion ounces which would fit into a cube 60 yards on a side), of which Central Bank holdings supposedly approximate 27,700 tonnes (accurate Central Bank gold holdings are and will forever be sealed from public access and scrutiny!). At 12 troy oz/lb and $525/oz, these world-wide Central Bank gold holdings amount to a US dollar value of about $349 billion, far less than the twin US Trade and Budget Deficits for a single year!
The US Federal Reserve/US Treasury stock of gold is reported to be approximately 8,500 metric tones, the largest single national holding, but some credible persons suspect the US does not own it all. But, even if it does, 8500 tonnes is only worth $107 billion at the current price of $525/oz - a drop in the proverbial bucket compared to our national debt of over $7 trillion.
Oil producing nations sold oil for gold (via the US dollar convertibility factor) until 1971, when the US reneged on its promise to redeem paper dollars from other nations for gold at $35/oz (and in the last three years it was $38/oz.). From about 1950 until 1971, "oil for gold" sales averaged about $4/barrel, a time when the dollar had been losing purchasing power for 38 years (and it's lost much more since 1971).
It was reported nearly a decade ago that the Saudi's would allow $1,000/oz for oil if it were paid for with ounces of gold. There were no known takers. That tells us that 1 ounce of gold could have bought close to 100 barrels of oil at that time, when oil was $10-12/barrel. "No known takers" tells us that the big players would not trade 1 ounce of gold for 14 times the amount of oil we buy today for the dollar equivalent price of gold at $525/oz. The mega-gold holding consortiums (and Central Banks) "in the know" must think gold is under valued at $1,000/oz for oil which was then priced at approximately 1/5th of today's price.
While it's highly unlikely that for the foreseeable future any nation will return to a gold convertibility standard, it seems very likely that since the Central Banks of the world do reportedly control 27,700 tonnes of gold, there would be at least two good reasons why the Bank of International Settlements might set an international price of gold at a very high level of many thousands of dollars per ounce. In our opinion those reasons are:
- They have so much of it, and
- It would magnify all Central Bank's economic power immeasurably!
However, by making this educated guess, we're not saying that people will have the ability to convert any of their currencies into gold at that time, but Americans have had that ability for the past 20 years. It was in 1986 that the US resumed the minting of US gold coins, so you can still convert your paper "dollars" into "legal tender" gold. We are of the opinion that this choice will not be available much longer. And, when the door slams shut on gold sales to the public by the mints of the world, acquisition of gold coins will become very costly. Therefore, it might be prudent for you to get yours while they are reasonable. Feel free to visit our website: www.goldeneagleenterprises.net
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