Oil and gold

First, let’s look at the oil market. About 20 percent of the price is because of the geopolitical situation, as even Middle Eastern oil ministers have been saying.

It’s no coincidence that Russian President Vladimir Putin is making friends with Iran — to the extent of selling armaments. Russia depends on exported oil for state revenue and is quite happy with the Middle Eastern turmoil and uncertainty that keeps the price high. In addition, the world is fearful that President Bush will make a pre-emptive strike against Iran, which will halt shipping in the Persian Gulf.

We all depend on oil. Oil at $100 per barrel or more will cause dislocation and inflation everywhere. It’s not entirely true that the Eurozone is indifferent to the oil price (Figure 2). Oil may not be as expensive as it is in dollar terms, but it’s still rising, and while European Central Bank (ECB) officials and others say a lower price for oil in euro terms relieves inflationary pressure. that is only vis-à-vis the pressure on the U.S. It’s still inflationary pressure.

Then there is gold, which has been rising regardless of inflation fear, which has actually declined in the past year (as shown by the spread between regular bond yields and inflation-adjusted bond yields, which has fallen from 2.56 percent in early 2005 to 2.35 percent today). It can be argued that the cause of the gold price rise is rising incomes in places that like gold, such as India and the Middle East, and has nothing to do with the level of currencies.