Gold, Black Gold and the Dollar

Although gold is no longer used as legal tender, it is still good at maintaining its purchasing capacity. The example of crude oil is quite illustrative.

The chart below shows fluctuations in dollar-denominated prices for crude oil and gold over the past 25 years.




Source: Reuters

As we can see, the upside is quite impressive. Interestingly enough, the exponential stage of growth began in the early 2000s, i.e. just at the time when Alan Greenspan’s soft monetary policy aimed at mitigating the consequences of the dot-com bubble began to produce an effect.

This policy also spawned a bubble on the real estate market, caused it to collapse and, eventually led to the much softer monetary policy which the Fed is currently pursuing. But let’s get back to the main issue.

Now let’s take a look at the chart with crude oil prices where the per-barrel price is depicted as grams of gold.


Source: Reuters

It’s abundantly clear that crude oil now costs about 12% less than it did 25 years ago when priced in grams of gold. And even crude’s meteoric rise to an all-time high in 2008 does not look like anything out of the ordinary in this chart.

Although gold is often said to be quite useless in the modern economy, as the industrial use of this metal is extremely limited, gold is not edible, nor is it a good monetary policy tool. However, as practice shows, gold could turn out to be quite a valuable way for ordinary people trying to protect their savings against devaluation. Especially in the long-term outlook.