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Commodities Investing: Gold rises, dollar falls

Posted January 8, 2008

"In terms of real money - gold - oil is still cheap. Then again, in terms of real oil, gold is cheap. In terms of anything real, everything else is realistic." — Bill Bonner

Blogger's note: Popular Daily Reckoning contributor Bill Bonner sent out this insightful and entertaining article today. According to Bill, the housing collapse isn't a collapse and the rising oil prices aren't really rising, if you look at "real money." You can find the entire article here or read on for more.

by Bill Bonner, The Daily Reckoning

Baltimore – (TFN):  Think the price of oil has soared? Think again.

Our colleague in Buenos Aires sets us straight:

"Since 2001 the dollar price of oil and gold have run in almost perfect tandem," writes Chris Lowe. "The gold price has risen 239% since 2001, while the oil price has risen 267%. This means that if the dollar had remained 'as good as gold' since 2001, oil today would be selling at about $30 a barrel, not $99. Gold has traditionally been a rough proxy for the price level, so the decline of the dollar against gold and oil suggests a U.S. monetary policy that is supplying too many dollars."

So there you are, dear reader. In terms of real money - gold - oil is still cheap. Then again, in terms of real oil, gold is cheap. In terms of anything real, everything else is realistic. In terms of gold, the ordinary American house is cheaper today than it was five years ago. In terms of oil, the average stock is barely half what it was five years ago. In terms of soybeans, even health insurance is a bargain.

What to make of it?

In terms of oil or gold, other commodities begin to look reasonable too. In fact, everything begins to look reasonable…even the euro (EUR). The European money has gone from a low of 88 cents to a high of nearly $1.50. Is the euro so great…or the dollar so awful? In terms of euros, American houses are about the same prices they were 10 years ago. Yes, there is a foul odor coming from the financial barrel. But it is the dollar that stinks.

One thing we make of it is the obvious thing: it is better to have real money than phony money. Real money holds up. When you have real money, you can buy real things…even if the price of those real things has soared in nominal terms.

Houses are real things. Land is even more real…in the sense that it can't be fiddled with easily. You can build more houses, but you can't create more land - at least, not easily.

"Land prices up 35%" says the Buenos Aires paper. Sellers are asking as much as $10,000 a hectare - about $4,000 an acre - for the best farmland. Small parcels bring as much as $15,000 per hectare, continues the report. They've been going up for the last six years, says La Nacion…which is about the same time commodity prices have been going up…and about the same time gold has been going up.

What a coincidence, no?

Soybeans have gone up 50% in the last six months. Farm profits have exploded, which have caused farmers to boost production as fast as they could. Small farmers and big agricultural corporations are both adding productive land as quickly as they can. Of course, a boom in production always precedes a crash of prices. But what does it mean when prices have only kept up with gold…that is, when adjusted to gold, they're not really up very much at all? Read on to find out.


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Posted by Bill Bonner · Filed Under Gold and Resources 

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