Oil, us dollar and gold – sme advisor sme dubai magazine for smes in middle east nis to usd


The correlations between Dollar-Oil and Dollar-Gold have always been a topic of ongoing discussion and debate. In following feature, top industry practitioner Nour Amache discusses fluctuations in the oil and gold markets, their impact on the dollar, and the way moving forward…

A lot of speculation exists about the future of oil prices and the consequent effect on the global markets, investment levels, aggregate demand and employment, especially as it pertains to the GCC region. This is what instigates countries such as the UAE to promote an economy not dependent on oil revenues for its growth and sustainability usd zar chart. This is seen through the UAE’s recent plan to celebrate exporting the last barrel of oil and build an economy independent on oil and market fluctuations, by adding new growth areas, creating efficiencies, and building productivity.

So what are the causes of this fluctuation in the gold and oil markets? Moreover, what is the relationship between these commodities and the US Dollar? Why is there an inverse relationship between their demands?

A rise in the price of oil tends to increase inflation (cost-push inflation- this has been the experience of many countries that bear high costs of production due to the gasoline hikes and the higher cost of operating machinery etc.). That said, when people anticipate a higher inflation rate, they worry about the value of their money since inflation erodes the purchasing povwer of the currency, which is what leads people to increase the demand for gold and hence pulling the gold price up. The experience of many countries prove this phenomenon: consider how people suffered and lost most of their lifetime savings through the Brazilian and the South American currency crises from 1992 to 1994, the South East Asia crisis of 1997 or the Russian crises in 1998, when their respective currencies’ collapsed historical exchange rates usd cad. Gold, on the other hand, cannot suffer such a failure because it is not created by a government at will, as it is the case with ‘fiat’ currencies created by decisions of central banks.

Oil, which is priced in dollars after the Petrodollar system was created in 1973, is not the only catalyst that drives the gold market. The status and health of the economy, as seen through the rate of unemployment, significantly affect the price of gold exchange rate rupee to usd. When unemployment is low, the value of the dollar tends to appreciate, which leads to a decline in the price of gold. This is the case with the United States: the latest job report released on February 5 showed that the unemployment rate dropped to its lowest levels in eight years, dipping to 4.9 per cent below the five per cent rate, which many economists consider as the ‘full-employment’ rate usd chart live. In parallel, wages are increasing at a steady rate of 2.5 per cent, higher than the projected rate of 2.2 per cent.

The overall picture seems promising; consequently, the gold price dropped sharply from US$1,161 to US$1,146 per ounce, just minutes after the release of the US jobs report. Nonetheless, this remains higher than the six-year low of US$1,1049 reached by the end of 2015. But since the number of jobs added in January in the United States according to the released report was only 151,000 jobs, which is below the predicted forecast of 190,000, then this suggests a possible delay in another interest raise rise, and hence imply that the gold price might pick up again as economic fears come again into the picture.

In a nutshell, “All other things being equal, a rising dollar means a falling gold price,” said Brien Lundin, editor of Gold Newsletter usd cad news. So, “over the short term, and especially during periods where monetary or price inflation isn’t a concern, then gold and the dollar do trade in a generally inverse way.”

Hence, ceteris paribus, the US dollar is moves inversely with commodities in general and gold in particular. Oil, on the other hand, tends to move proportionally with Gold. With rising oil prices, we expect to see a hike in inflation and as a result people rush to buy Gold which drives its price up.

The origin of the relationship between the gold and the dollar goes back to the Bretton Woods Conference that was held in July 1944 in the final days of the Second World War, which firmly established the US dollar as the global reserve currency. This conference was held to create a new global economic order in the wake of a global economy demolished by the war, whereby the United States emerged as a first substitute to the bankrupt and war-torn former global economic power Britain.

Most importantly, a new fixed exchange rate regime with the US Dollar was established, such that all global currencies were pegged to the US dollar. The US dollar would hence be fully convertible into gold at a fixed rate of US$35 per ounce, which created a sense of security among the nations in pegging their currencies’ value to the US Dollar and this assisted in bringing back stability into the financial system 1 usd to zwd. What this created was a strong demand for the US dollar as a preferred medium of exchange and to accommodate for this growing global demand, the US Federal Reserve would increase the supply of dollars by printing money exchange rate usd gbp. This is profitable for the Federal Reserve since it creates these dollars and then earns profit from them with the interest rate they set on it.

With the United States holding almost 80 per cent of the world’s gold reserves by the end of WWII, the US Dollar became the strongest reserve currency. This gave way to a massive economic expansion phase. Later by the late 1960s, the American government was spending tremendously, especially for funding the war in Vietnam usd rmb exchange rate. This record deficit spending worried many nations that started doubting the economic decisions of the US government, specifically with the increasing imbalance between US gold reserves and the US debt level, especially that the gold reserves were declining as many governments started demanding gold in return for their excess dollars.

In 1971, more nations were exchanging their excess dollars for the safety of gold and consequently trust in the American government to soundly manage its finances was declining. Amid this situation, Washington ought to fix its financial problem of massive spending and reduce its existing debt to restore trust in the US dollar; instead on August 15, 1971, President Nixon decided to abolish the International Gold Standard system and hence the convertibility of the gold to the US dollar. Accordingly, the US dollar was declared a ‘fiat’ currency that ‘derives its value from its sponsoring government- it would be issued and accepted by decree’.

By becoming a ‘floating’ currency i.e. not pegged to gold, the dollar would be susceptible to the market forces of supply and demand just like any other commodity. Furthermore, with the dollar becoming a ‘floating’ currency, so did the other currencies that were fixed to the dollar. This gave way to the rise of currency speculation and hedge funds online currency rates in pakistan. Under this new system, the Federal Reserve could print money at will without having to back it up by enough gold reserves, which provided monetary freedom. This, however, instigated a significant concern that the global demand for US dollars and US debt securities would drop considerably 200 usd to eur. To counteract this, President Nixon and his Secretary of State Henry Kissinger, developed the Petrodollar system- that is ‘dollars for oil’.

According to this agreement made between the United States and the Saudi Arabia, the Saudis agreed to price all oil sales in US dollars only and the Saudis would invest their surplus in oil revenues in US debt securities. In return, the United States would provide protection for Saudi Arabia’s oil fields, specifically military protection from Israel. By 1975, all oil producing nations of OPEC agreed to price the oil in US dollars and hold their surplus dollar revenues in US debt securities. This implied that the global demand for US dollars would not decline after the collapse of the Bretton Woods agreement; in fact, it would increase with the high rise in demand for oil worldwide.

This arrangement stimulated countries to search for ways to obtain US dollars that would enable them to pay for their oil imports. Hence, many countries opted to develop export goods for the US market, in order to exchange their goods for US dollars.

While there is a debate concerning the benefits versus costs of this system to the United States versus the rest of the world, the focus now is to understand how the price of gold is susceptible to changes in the price of oil and in the value of the dollar.

The price of oil is declining for a multitude of factors, including political reasons such as the lifting of the sanctions on Iran, which means a higher supply of oil in the global market, as Iran plans to increase supply immediately by 500,000 million barrels per day, with the potential of three to four million barrels per day. In addition, KSA and Iraq are currently pumping at record levels while the fracking firms in the US have boosted output from five million barrels per day in 2008 to nine million barrels per day now. Moreover, the depreciation against the dollar of troubled economies such as Russia, Brazil and Venezuela helped maintain their output levels by increasing their local currency revenues relative to their costs. Furthermore, the growing fear about action against climate change especially after the World Climate Summit 2015 has led some producers to increase their supply as hard as possible while they can, before the deployment of alternative energy technologies.

This rising supply coupled with a relatively lower demand leads to lower oil prices and consequently lower revenues for oil producing countries. This has many political and economic implications including a decline in projected revenues and a lower aggregate demand.

For this reason, and to avoid falling in the trap of market fluctuations, countries with a sound economic outlook are looking toward adopting policies that promote sustainable growth based on productive sectors independent of oil production.