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Back To Bancor, Gold And Oil Have To Gain

Economics / Global Debt Crisis Jul 03, 2010 - 02:35 PM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleThe euro rebound marks a predictable return to traditional habits for currency trading hackers, that is renewed attack on the US dollar. This action has new zest, more upside and downside than previous due to the euro now revealing itself. Coming out to full public view as a tinsel toy money, unable to shield the dollar it can accompany the dollar's fall against a very few select moneys and "stores of value". Against both the euro and dollar, the mighty Yuan can grow with G20 approval - by a few percentage points.  But how can both the euro and dollar devalue, easing the debt cord winding ever tighter on the jugular vein of Europe regional and US national finances ?

 Turning in ever smaller circles, political leaderships of debt-trapped OECD countries, especially in Europe, are approaching or bettering, by the negative and on the downside, the US no-win public finance situation.  Their trade balances are unremittingly negative and national budgets are impossible to finance with current receipts and revenues. The shadowy economic recovery, sometimes announced as a rebound, shows menacing signs of double dip, making the Euro - Dollar figure skating show on thin ice yet more unreal and unrelated to the real economy. Heavy borrowing by governments to bail out and support banks, insurance companies and financial market operators in 2008-2009, right across OECD-land, and huge national budget deficits have not produced what is called "Keynesian Recovery".


 Claims by the Obama administration that  "Yes - We are different" and the USA has real recovery are increasingly harder to defend with the right sets of nicely produced official statistics: there has been no strong economic rebound and the virtual future one may only be be wishful chart-gazing, backed by deficit spending. Real economic growth has migrated sine die to China and India and could produce a new-model meltdown, over there, sometime soon but not this week.

Money speculating or trading this week is in any case, and sine die denied its natural counterpart of interest rate speculating: higher interest rates in the US or Europe would spell instant death to the shadow recovery. Returning speculators to their traditional play trade - talking down the dollar. Against what ?

Heavy borrowing by OECD governments has stacked up so much new debt that, in theory the only solution is economic growth. If it happened, it would have to be inflationary. If it was not inflationary (for hard-to-fathom reasons) it would have to be made so by new excesses of money printing, to keep it from double dipping.

If economic growth doesn't happen, inflation can still and probably will happen as recent price data in Europe, even the most official and heavily vetted, tends to show. This brings us to the real Keynesian bottom line: Bancor.  The money of last resort when the global macro scene gets so ugly that denying debt and denying inflation needs the short cut of a new and single world reserve currency. Fiat of course.

This makes it certain that gold-and-oil are not going out of fashion in the short-term. Any economic recovery, for whatever perverse cause will result in stronger oil demand, helping oil prices to grow as the dollar falls.


Many reasons, even of the most pure economic theory type, exist for the failure of "classic Keynesian recovery". One of these is the theoretical recovery being based on massive new real debt. Adding this to existing huge debts of OECD governments, particularly the USA, Japan and most EU27 countries does not need a Nobel-science economist to predict the outcome. 

Debt load is now so high, and the financial crisis of 2008-2009 was so bad, governments were forced to concentrate on saving the banks and finance sector of the economy, but they had the time and borrowed cash left over to help a few sectors of the "real economy": their main targets winnowed down to mainly the car industry and green energy. Both are non-winners. Reasons include saturation ownership levels of car fleets in most OECD countries, and the laughably low performance of most green energy vanity projects. Keynes' famous multiplier spinoffs, almost as good as compound interest, were as absent and virtual as compound interest is real.

This creates a special situation of nearly-openly admitting impotence: gold can only gain in this context. Knowing we now have No Alternative but austerity, in some countries, but also No Alternative but a dash for growth, in other countries, a rip-roaring end of party season is in view. This dramatic but predictable schizophrenia is well summarized by recent IMF strictures on how to beat debt and generate robust economic growth, all at the same time. In an early June IMF paper, the Fund’s usual recipes such as privatisation, broadening the tax base to claw more revenues, “rationalising” or cutting public services, and structural deregulation of markets that must also be "better scrutinized", were given a predictable airing. To underline the double think, however, the IMF now also recommends simple austerity cures, called "consolidation" measures.

The reason is simple: plenty of EU27 states, rising numbers of US states, and plenty of non-success story Emerging economies are close to debt default. When sovereign debt default is no longer possible to hide or describe as "consolidation", and economic growth goes off the radar screen, gold will gain as the dollar and euro plummet.

As we know, China and India are still imagined as go-go growth havens in a troubled world, and only a a few Asian economies suffer "special circumstances" hindering growth such as Pakistan.  The real situation is shown by a nearly five-fold rise of IMF loans and engagements for 2009-2014.                                  

The IMF has committed US$3.8 billion in new concessional lending in 2009, more than double the commitments in 2008. It will also more than double the concessional resources available to low-income countries, to around $17 billion through 2014.  For China and India, and other Emerging economies, fast economic growth is still based on large export volumes to OECD countries and large inward investment flows. Inside both China and India, inflation is now recognized as growing quite fast. This again reinforces the attraction of gold buying, in both countries. In the 6 months since November 2009, India for example has purchased more than 275 tons of gold, well above 10% of probable world total gold production this year. Russia's gold buying has gone into high gear since early 2010.


The economic recovery, if it comes, will be inflationary. The double dip recession, if it comes, will be inflationary - meaning that prices will rise, and/or the buying power of money will fall. For the US dollar this erosion is, as we said, traditional. Going back to old and well-honed tunes, FX  traders can excel in their excess.  Among the swath of rising prices gold will have its place, and oil for as long there is inflationary recovery.

Only a few countries and only in special circumstances, have ever managed to sustain economic growth with deflation for more than a few years: Japan is about the only example. Any deflationary growth of the economy, in any country, will only be a short-lived phenomenon. To be sure, its news can help talk down gold prices a few sessions, but this process is similar to talking down oil prices. Only under free fall of the real economy, with global oil demand shrinking, can the oil price fall to "historic lows" such as midyear 2009 levels.

To be sure, both oil prices and even gold prices could fall. There is only one condition - sudden and sharp breakdown of global economic activity, right across the board.

The conclusion is simple: both gold and oil will gain from an inflationary situation. Their price rise will however not be smooth and predictable. Oil prices are always hostage to a slide back into recession, but growing gold prices and oil prices are a sure sign of the coming inflation surge.

One possible outrider of this, able to become a trigger, is the quick turnaround in trader sentiment on the US dollar. When the dollar is attacked, a traditional sport for FX traders and speculators, de facto depreciation of the dollar quickly encourages buying of gold and oil. To be sure this is no Bancor, but unlike Keynesian play money like SDRs, gold-oil bancor is real - and it works.

By Andrew McKillop

Project Director, GSO Consulting Associates

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

© 2010 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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