29 December, 2005

Gold and oil

I gave my wife several presents for her birthday. Among them was a pair of earrings. And thus I had my most recent exposure to the rising prices of precious metals. Why the rise? I heard more than one explanation. One salesperson told me the price of platinum was rising due to increased wartime demand for (unnamed) military procurements. But the trend seems to be that everything is rising, as if in anticipation of rising inflation.

The recent announcements by the Federal Reserve that it will no longer publish many of its standard indicators of the money supply may be fueling the concern. The date on whch the Fed will stop publishing--March 23rd, 2006 (reporting, of course, the week prior)--happens to correspond to the announced date --March 26th--when Iran is switching from dollars to euros for purchases of oil.

And how might these events be connected? Here's a little speculation from somebody who keeps a close eye on the gold market:

Call me silly, but has anyone noticed that the Fed’s last report of M3 just happens to be the week prior to the first day of trade on the IOB? You see, if countries like Japan and China [and other Asian countries] with their trillions of U.S. dollars no longer need them [or require a great deal less of them] to buy oil - does anyone suppose they might begin a wholesale liquidation of their U.S. Bonds [the primary instrument where foreigners ‘store’ their U.S. dollars]?

Well, count me in coach – because [barring an accidental war or invasion of Iran] the demand for Petroeuros [and subsequent liquidation of dollars] could have – in Greenspan parlance – highly undesirable effects on foreigner’s willingness to hold vast sums of U.S. debt obligations.

If [and I’m afraid when] foreigners begin wholesale liquidation of U.S. debt obligations, there is no doubt in my mind that the Fed will print the dollars necessary to redeem them – this would necessarily imply a an absolutely enormous [can you say hyperinflation] bloating of the money supply – which would undoubtedly be captured statistically in M3 or its related reporting.

I find it hard to believe the Fed could pump that much money into the system without somebody talking about it, but in this kind of situation having a little extra warning may be very important for currency speculators. And I fear that even if the Fed isn't planning anything, the rumor that it might could have serious repercussions. Nobody wants to be the last one to hold a falling dollar. So will there be a rush to the exits? This policy might encourage the sort of behavior it is supposedly designed to prevent.

No comments: