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''Midas'' commentary for Friday, August 20, posted in the clear at Gold-Eagle
12:08p ET Saturday, August 21, 2004
Dear Friend of GATA and Gold:
In the Financial Times story about oil prices
that is appended here, you may see what GATA
consultant Reg Howe was saying three years ago
this month in his analysis of U.S. Treasury
Secretary-to-be Lawrence Summers' 1988 academic
study of the relationship of interest rates
and the gold price. You also may see what GATA
consultant James Turk twice this year, most
recently this week, has been saying about the
true cause of the rise in oil prices.
It has taken economists and the mainstream
financial press years to acknowledge these
issues in even the most tentative way, but
perhaps the enormous increase in oil prices
has forced their hand.
That is, the ratio between the productive
economy, on the one hand, and money and
credit, on the other, is fantastically
imbalanced because of the explosion in the
latter.
Whether or not one accepts the evidence GATA
has presented for government intervention in
the gold market -- and those who don't
acknowledge the market-manipulating purposes
of gold leasing may never understand what
is happening -- can it now be acknowledged
fully that, amid a rapidly inflating money
supply, government has powerful motive and
opportunity for intervening in markets to
suppress the prices of strategic commodities
so as to mask its financial mismanagement?
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Too much money to blame for rising price of oil, economists claim
By Anna Fifield
Financial Times, London
August 19, 2004
http://www.nytimes.com/financialtimes/business/FT20040819_16237_53574
.html
As oil prices continue to set new records, markets,
manufacturers, and motorists alike seek to apportion
blame.
Sometimes it is violence in the Middle East,
sometimes it is Venezuela's political troubles, or
surging Asian demand, or Russia's crackdown on
oil company Yukos.
But while few would dispute the role of supply
disruptions in pumping up the price of crude this
year, a small but influential group of economists
thinks that a price fluctuation of this magnitude
is determined less by supply and demand for oil
and more by that for money.
They think interest rates have much greater
influence on commodity prices than is widely
assumed, and blame loose monetary policy in
particular for the current high level of oil prices.
If true, their contention underscores the
unpredictable consequences of monetary policy
and provides a powerful argument in favour of
tightening monetary control.
Mervyn King, the Bank of England's governor,
has defended central banks from the charge that
their lax policies have fuelled the oil price rise.
But he conceded that aggressive rate cutting
may have contributed to the rise in commodity
prices, including oil.
"I think there has been an expansion of money
and liquidity around that does lead in general to
an increase in asset prices, of which
commodities prices are one," Mr. King said last
week. "But that has, of course, been a deliberate
response by the monetary authorities to the
situations in the economies which they each
face."
Since 2001 the U.S. Federal Reserve has cut
interest rates 13 times, and left its main rate at
a historically low 1 percent for a year before two
rises in June and last week took it to 1.5
percent. Japan's ultra-loose monetary policy,
meanwhile, shows no sign of changing. While
conventional economic wisdom says that
supply and demand factors are what drive
changes in oil and other commodity prices, the
influence of monetary policy cannot be
overlooked, some analysts say.
Eric Barthalon, chief economist at Allianz
Dresdner Asset Management, has tracked a
correlation between U.S. public debt held by
central banks a measure of overall global liquidity
and the oil price. Meanwhile, the ratio of global
reserves to world trade, another measure of
global liquidity, has risen for two years at the
fastest rate since the 1970s the last era of oil
shocks according to data collated by the
International Monetary Fund.
"Whenever you print money in excess of the
needs of the real economy, you create a
situation where people try to spend it, to get
rid of excess liquidity," said Mr. Barthalon.
"We are in a situation where the U.S. current
account deficit is not financed by foreign private
savings but by global money creation -- money
is being created out of thin air."
This tends to be spent on the likes of oil and
steel, he says. "The markets that are most likely
to react the fastest are commodities markets.
And in creditor countries like China, the
economy is booming and so is the demand for
commodities."
Economist Jeffrey Frankel of Harvard's Kennedy
School of Government has argued that changes
in oil prices are at least partly the result of real
interest rates -- nominal interest rates adjusted
for inflation. "If short-term [real] interest rates are
low, then speculators borrow in U.S. dollars and
go long in other things, in this case in
commodities, so this could explain some of the
big run-up in prices," said Mr. Frankel.
Over the past two years, Nymex crude oil futures
have risen by more than 50 per cent, setting a
record close to $47 last week. Meanwhile nickel
prices have more than doubled, while steel is up
by about 60 percent and gold by 25 percent.
Stephen Roach, chief economist at Morgan
Stanley, thinks the world is now seeing a
commodities bubble. "Central banks have been
biased toward excess accommodation in the last
four years, and that has left the environment ripe
for bubbles," Mr. Roach said.
Although Mr. Roach thinks exuberant Chinese
demand was driving up commodities prices, he
lays some of the blame on the monetary
authorities. "A key proponent of rising commodity
prices has been investors and speculators and
hedge funds in particular, searching for a return
in a low-return environment." Mr. Roach says
there would be a "sharp reversal" in commodity
prices as China's economy slowed, but Mr.
Barthalon says foreign exchange reserves growth
means the annual average price of oil could rise
by 15-20 percent over the next two years.
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----------------------------------------------------
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