Gold and Oil as Economic Delimiters
With gold rallying continually since roughly 2002, no matter what happens in the economy, or the world, and oil rallying too, are there price limits both have which if reached, will stall the world economy?
Well, for oil the answer is much easier; yes, if oil hits $150 a barrel, then you can be sure the increased costs across the world economy will cause GDP to drop a few points. Oil alone can do that.
Now, as to gold, well let’s ask the same question. Is there a gold price that if reached would cause a collapse in the world economy and thus related commodity prices? And even if Gold held its critical price (I’ll guess a price in a minute) and did not drop, would the rest of the economy collapse anyway?
I think absolutely.
Let’s put aside the oil argument and look at the gold discussion. Supposedly gold could keep rising till it hits say $3000. I would surmise that price would mean at least a 50% increase in food prices, partly due to the rise in oil prices, which no doubt would follow $3000 gold to make oil rise from say $150 range now as a high, to say $250.
The old world economy would stop on a dime. People would not be able to drive to work, gas would be twice as expensive, at least $9 a gallon in the US. Everything from fertilizers to diesel would double. This all could be inevitable anyway due to population growth.
China, likely could sustain these prices for a while, particularly since they have not yet built a 200 million vehicle rolling stock that gets 18 MPG. They can adjust and create mini vehicles that get 36 MPG with present technology.
But, the US would not fare well at all. We can’t just replace 100 million inefficient vehicles overnight. The US represents the old economy in many ways, as well as the new information economy. But the old economy is where the high oil and gold prices would hit hardest. IE the US middle and lower classes.
So, jumping ahead, even if the USD crisis were to develop to the point that gold hit $3000 USD in price, the effects on world commodity prices and demand would be devastating. That would in turn affect the commodities hurt most by rising fuel prices, like food, and food inflation is the critical element we are hitting the wall at right now.
Riots already indicate the critical price levels are being hit in food
So, see, if food riots start, ‘adjustments’ to demand, with chaos will happen. Then you get Egypt, a new Middle East, and maybe even a new China. China has been working overtime to block information of the Mid East riots to prevent its spread to China. And it’s not clear China will escape mass rebellions either, they already are having 50,000 public demonstrations a year anyway due to corruption, or more recently, food prices.
But, while I can easily foresee gold hitting $3000 an ounce, what I cannot foresee is the world commodity prices staying so high if they cause a huge drop in world GDP and another depression due to inflation.
So, it’s hard for me to say gold and oil will rise beyond say $150 or say gold $3000 without a major interruption in the general commodity price increases, due to demand falling from too high prices. IE an economic reaction that stops the relentless inflation.
Now, we can have inflation, and still have an economic recession, look at the stagflationary 1970s.
So it would seem more likely that the US economy would collapse before we ever got to gold $6000. But we might well see $3000.
Summer is going to be a pivotal season this year for all markets because the US QE2 is ending in July/June.
That might cause the expected and needed correction in Western financial markets and stocks, and slow these oil and gold price increases for a while.
In any case, we are indeed in the middle of a screaming oil and gold market.
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