Gold Glows and Oil Shines

Turning in ever smaller circles, political leaderships of debt-trapped OECD countries and especially in Europe are approaching a no-win situation.

Heavy borrowing by governments, to bail out and support banks, insurance companies and financial market operators in 2008-2009, and huge national budget deficits have not produced what is called "Keynesian Recovery".

Certainly in Europe and Japan, and perhaps also USA despite reassuring words from the Obama administration, there has been no strong economic rebound, through deficit spending.

Heavy borrowing by OECD governments has only benefited certain sectors of the economy. Apart from banks and finance establishments, most help has gone to subsiding buyers of new cars, called "low emission and fuel efficient". In other words smaller and cheaper cars, like the Renault Dacia range, which generate lower unit profits for the car making companies. Government aid to the "green energy" sector has also been very large in countries such as Spain, which now face very serious national debt, budget deficit, and borrowing problems.

As we know, most green renewable energy sources and systems are high cost and small scale, are often very high-tech, and do not generate many jobs or export opportunities. Subsidies to green energy are now being cut back by large amounts in Spain, Denmark, Germany, the UK, France and other countries, including the USA.

This makes it certain that any economic recovery in these countries will result in stronger oil demand, helping oil prices to grow.

Impact on golf prices

Many reasons exist for the failure of "Keynesian Recovery" and these include the fact it is based on massive new debt, added to existing huge debts of OECD governments, particularly the USA, Japan and most EU27 countries. Debt load is now so high, and the financial crisis of 2008-2009 was so bad, that governments were forced to concentrate on saving the banks and finance sector of the economy. This made it difficult for them to help all sectors of the "real economy", and their main targets were reduced to mainly the car industry and green energy.

This creates a special situation where there is only one alternative to long-term austerity: Go for growth. Unless economic growth is restored, all the OECD countries with very large national debts and budget deficits will have no alternative but austerity. Some may default on their debt, creating crises similar to the present Greek and Portuguese debt crisis, and emerging Spanish debt crisis.

The economic recovery, if it comes, will be inflationary - meaning that prices will rise, or the buying power of money will fall, or both. The recent fall in the value of Europe's Euro against the US dollar is an example - but as we are seeing, the US dollar is far from strong, and itself can start to fall. This is the real trend for more than 10 years, when the real buying power of the dollar is measured against oil or gold, or other "real resources" including precious metals, base metals, minerals and food.

Presently and for a short while, it is possible that prices of many industrial goods and raw materials will go on declining, or not growing. This is called deflation, but is not a stable process and can very quickly change to inflation.

As we know, the Asian economies are mostly growing fast, except in special circumstances such as Pakistan. For China and India, with a combined population over 8 times the USA, very fast growth is still based on large export volumes to OECD countries and inward investment to China and India. Inside both China and India, inflation is now recognized as growing quite fast. This helps to explain the continuing strong interest in gold buying, in both countries. In the 6 months since November 2009, India for example has purchased more than 275 tons of gold. This is more than 10% of world total gold production in 2009.

If there is worldwide economic recovery, this growth cannot happen without inflation. In turn this will further increase gold buying, pushing gold prices higher. Even in Europe, the hardest-hit region for economic recession, government debt and money weakness, recent data for inflation, in May 2010, shows that inflation is growing. Only a few countries, especially Japan, have ever managed to sustain economic growth with deflation for more than a few years. It is therefore very likely that if there is any deflationary growth of the economy, in any country, this will be a short-lived phenomenon. The possibility that prices could go on falling, or not rising will certainly not continue into 2011, unless there is sudden sharp breakdown of global economic activity.

Gold and oil have to gain

The conclusion is simple: both gold and oil have to gain from an inflationary situation. Their price rise will however not be smooth and predictable, but the rise of gold prices and oil prices will be a sure sign of the coming inflation surge. One possible trigger for this, we can note, is a quick turnaround in trader sentiment on the US dollar. If the dollar is attacked - shown by the Euro tending to recover against the dollar - there is de facto depreciation of the dollar, and loss of buying power quickly reflected by increased buying of gold and oil.

At this time and in this context, oil producers will need to be vigilant. If the nominal price of oil in US dollars is falling, and the real value of the US dollar is falling due to inflation, the oil price must rise simply to cover this trend. Weakness of the artificial and new Euro should not be confused with the long-term trend for lower purchasing power of the US dollar.

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