Black Gold. Worth More than Real Gold?

Mike Conlon
Senior Instructor
instructor@mywealth.com

Let’s face it: gold is very pretty. It makes for great eye-candy when dangling from some starlet’s neck, usually holding some other equally beautiful gem or precious stone. But what’s it really worth?

 

 

Well that’s pretty easy, just take a look at the current quote for gold or a gold chart, recently trading around $909/oz. But what does that really mean?  Well I’m not going to rehash the basic laws of supply and demand, but:

 

 

There are many other uses for gold besides just making pretty jewelry.  There are many industrial and engineering uses for gold as it is very malleable, it’s resistant to corrosion, and it conducts electricity. So what? What does that mean to me? Absolutely nothing! Why? Because I have choices. I can choose not to buy it and it doesn’t affect my life one way or the other. 

But oil? Now that’s a different story.   Now I realize that here in the US we’re making a push toward renewable energy and trying to wean ourselves off of foreign oil, but right now we are still years away and it is also cost-prohibitive. Back when oil was $147/barrel and gasoline cost $4.00/gallon, I chose to amend the way that I consumed oil, namely by driving less, and turning down my heat in the winter. But this is something that affects my life directly.

 

 

 Well, throughout history gold has been symbolic of wealth and power and in modern times has been known as a hedge against inflation. When Nixon took the US off of the gold standard in 1971, he was merely decoupling one symbol for another! (gold vs. paper) And in 1971, what was the biggest source of wealth and power? That would be the United States. (Whether or not this was true at the time is up for debate, but it seemed to work.)

 

Fast forward to present day. The US doesn’t seem as wealthy and powerful in comparison to other nations and the disparity between that wealth and power gap has narrowed considerably since 1971.

 

As a result, much has been made recently about the consternation regarding the use of the US dollar as the world’s reserve currency, and nations such as China and Russia have recently been calling for changes. 

 

Which brings me back to gold and oil. It appears now that our economy has “stabilized” for the time being and that we might be in the early stages of recovery, yet it seems like deflation is rearing its ugly head. It looks like BOTH gold and oil has been selling off recently.   Is this a minor blip or a trend reversal?

 

 

 

 

Unfortunately, the fall in the price of oil means that demand may be falling which could be indicative of the world economy not recovering quickly enough. This is actually good news for the US dollar as it will gain strength from the “flight to safety” trade, but deflation will bring down both gold and oil.

 

As far as the intrinsic value of gold is concerned, to me it’s worth as much as a piece of paper with a president’s picture on it. And it’s not as easy to carry. Give me oil any day of the week. 

 

All of the gold bugs who are hording gold coins in safety deposit boxes are living a fantasy.   If they were sane or smart, they’d starting hording oil. At least they’ll be able to heat their homes and cook warm food, rather than just sitting around with their gold hoping to look pretty enough to be asked out on a dinner date!   Because once everyone figures out that gold holds no more value than a piece of paper, it too will lose value.

 

Now if I can just find away to carry around some oil.

 

To learn about how currencies and commodities are inter-related to one another, be sure to check out our investing and currency courses.