Mark your calendars.
The old dollar may be gone and the day of the new dollar may have just arrived.
Today, as the U.S. dollar moved to a multi-week low against the Euro currency, gold hit a new all-time high over 1,043.00, breaking the previous record of $1,032.35 a troy ounce in March 2008.
Gold nearly reached that price last month, but backed off below $1,000. Since the end of 2008, gold prices have moved up about 18 percent.
While worries about inflation and the growing U.S. deficit have kept gold prices hovering at about a thousand dollars an ounce for the past few months, these new highs may have been sparked by persistent rumors that the OPEC countries are contemplating a move away from the dollar as the exclusive trade currency for oil.
Just a Question of When
Several financial news agencies, including the Wall Street Journal, Bloomberg and the Financial Times of London have been reporting on secret talks between a number of oil producing countries like Saudi Arabia, Qatar and Kuwait in conjunction with Russia, China, Japan and France to replace the dollar with a basket of currencies to trade crude. According to circulated reports, the basket would include the Japanese yen, Chinese yuan, the euro, gold and a new currency planned by member states of the Persian Gulf Cooperation Council (GCC).
At the present time, oil prices are exclusively denominated and purchased in U.S. dollars. This arrangement has had significant benefits for the U.S., but as the dollar weakens, the global price of oil has been forced higher.
The dollar denomination of oil permits the U.S. to pay for its petroleum purchases with weaker dollars. To hedge their reserves and protect the value of their investments, oil producers say they have been compelled to raise global wholesale prices.
A shift away from dollar pricing by oil-rich Arab states also could add to mounting pressure to abandon the greenback as the world’s only reserve currency. Even before the financial crisis and recession began, China, along with several oil producing nations, had been leading the charge to unseat the dollar from its exclusive perch atop the world’s other major currencies, including their own.
For its part, the dollar has been dogged by concerns that rock-bottom interest rates and soaring government debt in the U.S. will undermine its value. Throughout most of this year, the dollar has lost ground against a basket of rival currencies including the Japanese yen and Canadian dollar.
Price of Gold Likely to Stay High
Over the past few weeks, the Australian dollar, along with Canada’s loonie, has been among the biggest winners in the currency sweepstakes. Both are resource-based. As the prices of commodities such as gold, oil, iron ore and coal, have pushed higher, the Australian and Canadian economies have found themselves recovering at a relatively faster pace than their trading counterparts.
To combat rising concerns over recovery-related inflation, Australia’s Reserve Bank has lifted its core interest rates by a quarter percentage point and has signaled further increases to fend off inflation. This move has caused a buying frenzy on the currency Down Under.
Gold’s luster has also been burnished by Switzerland's Credit Suisse Group that launched a new physically backed gold exchange-traded fund (ETF) in dollars that can be hedged in Swiss francs and euros. Most analysts believe that between 10 and 20 percent of all current gold demand can be accounted for in ETF holdings.
Many analysts expect gold to pull back from these highs, but even the more conservative banks are predicting gold above $1,100 an ounce in 2010 or sooner.
International financial powerhouses, like Germany’s like Deutsche Bank, said it believes dollar weakness, higher inflation, central bank-buying and a more rigorous enforcement in position limits in energy and agricultural markets will retain the appeal of precious metals. Analysts at Bank of America’s Merrill Lynch unit are projecting gold will rise to $1,500 an ounce by 2011, underpinned by continuing fragility of the U.S. dollar.
Not the First Time
Feverous trading in gold has also bolstered the prices of other precious metals like silver, platinum and palladium. Silver is up 79 cents, above $17.35 an ounce. Meanwhile, January platinum rose $18.10 to $1,319.90 an ounce, while December palladium gained $1.70 to $305 an ounce.
Because there are no settled substitutes to the dollar, the short-term prospects for alternative oil pricing remain unclear. The move away from dollar-denominated pricing, however, is not without precedent.
About three-years ago, Iran, OPEC’s second largest producer behind the Saudis, re-cast its pricing in a combination of euros and yen. Not surprisingly, Iran’s oil minister along with it controversial president, Mahmoud Ahmadinejad, said they are very happy with the switch away from the dollar and have offered to show other oil producers how they did it.
In an odd twist of fate, one of the dollar’s few saving graces going forward may be the monetary actions by Iran. Because of its pariah-status in the international community, the mostly politically moderate OPEC states may want to avoid any appearance that they have become even marginally aligned with Iran.
I never thought I’d saying this, but thanks Mahmoud.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
