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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
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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Chris Laird
Prudent
Squirrel
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