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Barrels per Ounce

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Gold is trading at record-high prices, above $1500 per ounce. Oil is trading around $110 per barrel ($2.60 gallon, to put it in terms similar to retail gasoline).

The politicians and pundits and current President have opinions and policy proposals regarding the price of oil. The touts and investment gurus are using the record gold price as reason to suggest buying gold. Buy high, sell higher!

Nobody outside the trading and investing universe seems to realize that the prices of gold and oil are relative. Not to each other, directly. But they’re both priced in terms of dollars, so the trading prices of those commodities are a reflection on the value of the dollar itself.

Oil and gold are fetching high prices due to not just the supply and demand of oil and gold, but also due to the supply and demand for U.S dollars.

If a policy maker wanted to reduce the price of oil, he could do so without screwing with energy or environmental policy. Instead, use monetary policy. Make the dollar worth more, and a barrel of oil could be had for fewer dollars.

The same is true for gold. But metals prices don’t get so much attention from policy makers because the common man doesn’t rely on gold to facilitate his lifestyle. There aren’t any votes to be gained by manipulating the price of gold.

Among the precious metals, gold is perhaps the least useful to the common man. It’s not a commercial or industrial commodity. Gold is mostly just an alternative kind of money.

The price of gold—in dollars—is effectively a measure of what a dollar is worth. Record highs for gold are record lows for the dollar. It’s not really that simple, though. The price of everything is relative to the price of everything else. And even money has a price: interest rates.

Since gold isn’t burned up once someone buys it, the world supply is always increasing. Basic laws of economics say that as supply increases, price falls. But that law has a condition. The demand must remain the same.

If people demand more gold for some reason—maybe because dollars aren’t holding their value—the supply and the price can go up at the same time.

At the same time, it’s important to keep in mind that there are two sides to every trade. When gold is selling for $1500, that means someone is selling gold. For all the reasons one hears to buy and own gold, like as a hedge against inflation or as security should the modern economies collapse, someone else is weighing all the factors and deciding now is the time to sell.

Mining companies are always selling. They’re in business to dig up money. But their total production is small compared to the accumulated amount of gold already mined. Unlike oil, the current price isn’t affected much by extraction problems. The oil supply is subject to Middle East politics, Gulf of Mexico hurricanes, Indonesian earthquakes, terrorist attacks on pipelines and terminals, and various civil wars.

Gold doesn’t care about that stuff. Nobody needs gold. All the world’s industrial processes could continue for a very long time even if all the gold mines closed. It’s not crazy to say that the world already has all the gold it could ever use. Unless it is discovered that bling halts the aging process…

So, other than the miners, who is selling gold at these record prices? The volume of trade is more than just people cashing in school rings and gaudy chains. Somebody wealthy enough to have vaults of gold is meeting the demand. Why aren’t they worried (as as worried) about inflation?

Figuring out the who would help solve the why. And knowing why could make you rich.