Oil and gold prices both hover just below all time highs as of this morning (December 27), following the assassination of Pakistani opposition leader Benazir Bhutto.  As with any political assassination, unrest tends to have an impact on world pricing depending on the location and nature of the tragic event.

Oil rose to just below $97 per barrel as it nears an inevitable visit to three-digit price territory.  Like oil, gold prices reached a one-month high as well as nearing historic highs, at $830.41 per ounce this morning.  Gold reached its record high of $850 in US currency in 1980, after it was allowed to float against the dollar in 1971.  Prior to that, gold and dollars were view synonymously in terms of worth.

Interestingly, as oil and gold near records, the dollar has fallen to record lows against many European and world currencies.  Since gold was allowed to float against the dollar, the US government has not reserved as much gold as it once did.  Before the float, theoretically, every monetary dollar unit had a gold reserve to back it.  The intention was to maintain economic stability in the face of a dramatic change in the countries currency.  Gold has always been a stable and respected raw material due to its rarity, and subsequent high value.

Gold mining only adds about two percent to stock reserves of world countries each year.  Gold is a very unique raw material.  Unlike other raw materials that are valued for their use in manufacturing and product development, gold has maintained a strong value simply as a rare material held by countries for its world monetary value.

Economist James Turk, founder of goldmoney.com, has predicted a collapse of the dollar and a simultaneous dramatic surge in gold value in the coming years.  With inflation, the $850 per ounce that gold earned in 1980 would be $2,100 in today’s money. 

Turk believes that as world currencies struggle to maintain value, gold will continue to be known as a safe investment.  In fact, Turk has indicated on his site that he believes gold could reach an incredible $8,000-10,000 per ounce by 2013.  While this sounds unbelievable, he suggests that when inflation is adjusted for, this is not as significant of a rise as it sounds, historically speaking.

The US dollar has generally moved inversely with oil and gold prices in recent history.  In fact, many investors watch gold prices to try to predict dollar moves, and vice versa.  As dollar prices fall, investors tend to look to gold as a secure investment.  Countries like Australia (who has seen recent record currency rates versus the dollar), which maintain higher gold reserves than the US government, tend to increase in value against the dollar and other currencies when gold rises.  Their currencies are seen as safer when gold is more valued, as their currencies are backed by gold.  Similarly, countries that have strong oil industries and reserves see strong currency shifts when oil is more valued.

Oil price increases are usually seen as negative for the US as its economy is largely dependent on foreign oil, in spite of investment in alternative fuel sources.  Gold increases do not favor the US dollar and economy as much as more gold-based economies.  There are many Americans who participate in gold speculation, which has a large impact on price moves, as gold value is largely valued for its holding interest as a safe money investment. 

As the US economy and dollar slide, gold should continue to rise and likely surpass records.  Only time will tell if gold will rise as dramatically as some economists believe, but for now, it seems to serve as a safe investment for many Americans looking to manage the dollar decline and housing slump.  As long as turmoil persists in the Middle East, and the US is dependent on foreign oil, prices will also rise for this resource.

Market Recap

The US stock markets ended flat in Wednesday’s post-holiday trade.  The Dow was up 2 points on the day, with the NASDAQ up 10 points.  Target forecasted lower sales in the midst of concerning retail data.  Oil prices rose to their one month high, which helped energy company shares.  Thursday’s market opened down after Pakistani opposition leader Benazir Bhutto was assassinated.  His assassination is expected to lead to political unrest which is never good for equities markets.  Oil and gold neared record highs in the morning.  Durable goods orders were also a disappointment to Wall Street as a slight increase fell short of expectations.  The Dow was down 145 points (1.07%) as of mid-afternoon trading.

Neil Kokemuller
Thursday, December 27, 2007
1:30 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

Please note:  The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments.  Actions taken on the basis of the information shared is at the sole risk and discretion of the individual.