Flashback: Can Iraq's Policy Affect the US$

September 29, 2000

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?

The purity of gold is measured in carat weight.