A typical price chart for a barrel of crude begins in the early 70's and is annotated with a series of political events shown to be affecting the price.

While this presents a compelling argument that politics plays a large role in the price discovery of oil, it is interesting to look beyond 1970.

We find that prior to early 70's, the price was relatively stable, rising from US$1.63 to US$3.60 in 1971. It is only after this period that prices begin to fluctuate wildly.

When we price crude in grams of gold, we find the development of a very narrow trading band. In 1986 it took only 1 gram of gold to buy a barrel of crude, today it now costs between 3 to 3-1/2 grams of gold.

Given that crude priced in gold grams is much more stable than when priced in dollars, it appears that the value of the paper dollar is the largest determinant for price of oil.

On Aug 15, 1971, President Nixon closed the gold window, resulting in the US dollar to be no longer backed by gold. This coincides to the beginning of large price fluctuations in oil and arguably is the largest cause for such volatility.

Published on http://DollarDaze.org - Oct 6, 2008.

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© 2008 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.

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Posted in Oil, Gold, Mike Hewitt