The Covert Gold Cost of Oil

Introduction -

Following is an imaginary meeting taking place in London on the 10th anniversary of Wall Street's worst meltdown. It was exactly 10 years ago (October 19, 1987) the Dow plummeted 508 points for the worst ever one-day 23% loss. This real occurrence created the background for the imaginary meeting of world financial leaders and representatives of Middle-Eastern crude oil producers.

The attendees of our imaginary meeting are numerous chairmen of world leading Central Banks and the financial spokesman of the oil-producing Middle-East, Sheik Abu Bekr al-Rashid. As was the initial meeting of this august body on October 20, 1987, Sheik Abu Bekr al-Rashid will again preside.

Sheik Abu Bekr al-Rashid:

"Gentlemen, exactly 10 years ago we met in London to discuss the grave concerns of the oil-producing States in the Middle-East. We showed how the oil-producers were subsidizing the economic growth of the rest of the world by maintaining low crude oil prices. Moreover, we also expressed our worry that the economic health of the oil-producers was dependent upon only ONE-COMMODITY. Furthermore, that one-commodity was finite in that it is subject to depletion. And at the rate the more industrialized countries are guzzling our oil, we fear for the longer-term economic stability of the Middle-Eastern countries - especially when India and China get up steam."

"Gentlemen, it gets even worse for us. For years we have been accumulating US dollars -- as world crude prices are always quoted in the greenback. The ever growing mountain of $US has been reinvested prudently in a diversified fashion. However, the amounts are so immense, the bulk of oil revenues have been invested in financial or paper assets... predominantly in the US stock market. Herein was the cause of our dilemma, which turned literally into a financial nightmare on October 19, 1987."

"For these reasons the oil-producing States convened the meeting on October 20, 1987 - the day after Wall Street's debacle. On that momentous day the members of the oil-producing States hammered out the historic agreement with you gentlemen -- Chairmen of the world's most prominent Central Banks. And today we meet to determine if our plan was effective. Let us review the concerns -- and positions of negotiation of both sides in 1987."

Middle-East Concerns:

1. Sale of a depleting asset at low prices.
    
2. Vagaries of the world stock markets.
    
3. Inevitable loss of purchasing power of paper investments.
    
4. A rapid rise in gold prices if we purchase on the open market.
    

Industrialized Countries Concerns:

1. Unstable long-term crude oil prices.
    
2. Inability to control negative effects of inflation.
    
3. Inability to control the public's expectation of inflation.
    
4. Need to maintain low interest rates to finance the US Federal Debt and create wealth by "feeding" the financial markets.
    
5. Political motives beyond the scope of this discussion.

"Gentlemen, you will recall that the plan had to necessarily address ALL of the CONCERNS of the oil-producing States, and those of the Industrialized countries. The oil-producing States agreed to maintain stabilized crude oil prices over the long-term. THIS WE HAVE DONE, except during the short 1990 "Desert-Storm" unpleasantness, when Hussein became unruly. In exchange for stable energy costs, you gentlemen would "facilitate" our acquisition of gold at low or diminishing prices. THIS YOU HAVE DONE."

"Gentlemen, it pleases me to present the following charts, which clearly demonstrate the successful results of our careful planning."

CHART 1 - $US Price of Gold

"On the day our plan went into effect spot gold was $472 per ounce. Exactly 10 years later it is $325. Exemplary gentlemen, that represents a compound annual price reduction of 3.66%. Admirable. It allowed us to accumulate substantial quantities of the noble metal, which as you all well-know is an important part of our cultural need and long-term planning."

CHART 2 - $US Price of Crude Oil

"On the day our plan went into effect spot crude oil was $19.02 per barrel. Exactly 10 years later it is $21.02. Exemplary gentlemen, that represents a compound annual price increase of ONLY 0.97%. LESS than One Percent per annum. That is less than half the world's population growth rate. Admirable. It allowed you to economically build your economies and industries with cheap energy costs."

CHART 3 - Gold Cost of Crude Oil

"Through the mechanism of our plan the oil-producing States have sold their depleting asset to the rest of the world at an ever-increasing gold price. On the day our plan went into effect the Gold Cost of Crude Oil was 4.04 ounces of gold/100 barrels. Exactly 10 years later it is 6.67 ounces of gold/100 barrels. Exemplary gentlemen, this represents a 4.82% compound annual gold-price increase of our crude oil. In sharp contrast most world commodities have NOT done nearly as well. Well done gentlemen, well done!"

"Gentlemen, may I congratulate US ALL. The plan has BEEN A RESOUNDING SUCCESS FOR US,... that is until now. It appears our covert agreement has leaked, resulting in a growing demand for gold. The all important question the oil-producing States have to you Central Bankers is the following: How long can the Central Banks continue to hold down gold prices, so our plan may continue to function to OUR EXCLUSIVE BENEFIT?"

"Gentlemen, the crucial and pressing situation is best captured by an American expression, "...the cat is out of the bag," what happens now?"

"Gentlemen, I leave you to your devices."