Dollars, Gold and Oil - It's All Relative

Written By: Chris Woodward  |  Posted: Sunday, June 5th, 2011

            An expert on world markets is suggesting another reason for why oil prices are still up -- and it has nothing to do with supply and demand or the Middle East.

            According to John Tamny of RealClearMarkets, the price of oil has not fallen much in relation to how the dollar has strengthened in recent days. Proof of that is the relationship between gold and oil.

            "In 1971, when a barrel of oil was $2.50...an ounce of gold at $35 bought 15 barrels of oil. In 1981, when an ounce of gold was $480, it bought 15 barrels of oil at roughly $35 a barrel," he explains.

            This month, gold is trading at $1,500, while oil is trading at close to $100 -- another 15-to-one ratio.

            "The point here is that gold's price is just a proxy for the dollar; gold rises when the dollar weakens," Tamny adds. "What that's telling us is that oil has not become expensive. We don't have a supply problem. We don't have problems in Libya or too many Chinese demanding oil. What we have is that the dollar has been cheapened. Hence, oil is expensive."

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