Black Gold

A couple of weeks ago, I turned to my colleagues at the office and asked: how much do you think the price of oil has appreciated in the last five years – in terms of gold.

In other words: if you could buy x barrels of oil for y ounces of gold in January 2003 (post-Afghanistan, pre-Iraq), how many more barrels could you buy today for the same amount of gold?

The answers ranged pretty widely, but the general consensus was that while the price of oil had not jumped as far in terms of gold as it had in terms of dollars, it had still jumped quite a bit.

Well, here’s the answer, at least as of a couple of weeks ago:

So what does this mean? That oil has not “really” gotten more expensive – rather, the dollar has been debased? That the market is anticipating a debasement of the currency in response to a rise in oil prices driven by more fundamental factors? That oil and gold are both being driven by geopolitical risk factors that dominate over supply and demand? That, having passed “peak oil” the price dynamics of oil will henceforth more closely approximate those of a commodity like gold whose supply is relatively inelastic (as opposed to, say, corn)?

A Wall Street sophisticate like myself – and a man who praised “helicopter” Ben Bernanke back when his appointment was first announced – should be immune to the charms of the Ron Paul goldbug brigades. But this is a point that advocates of the gold standard don’t make with sufficient frequency: in “fiat” currencies, price signals are much harder to interpret. That, in turn, raises the return hurdle to investment, because investors must be compensated for that fundamental uncertainty. And it makes the job of the central banker much more difficult. Unsurprisingly, the power central bankers have to add and withdraw liquidity from the system, and hence weaken or strengthen the currency, in itself makes it that much harder for them to determine what monetary stance is appropriate in a given situation.