OPEC's Dollar Gaffe Means You Should Go For Gold

An accidental reception of what was supposed to have been a "closed-circuit" broadcast of a recent meeting of the OPEC (Organization of Petroleum Exporting Countries ) caught members discussing the merits of dropping the U.S. dollar as the benchmark currency for oil deals. A recent report from James Turk at our U.K. affiliate MoneyWeek Magazine says this highlights another reason to buy gold.

Several weeks ago, gold dropped $46.80, a decline of 5.6% in a single week. That drop seems fairly large, but let's step back to get some perspective.

It is interesting to note that in the 79 weeks since May 2006, when the yellow metal reached its high, there have now been [including the latest one] five weeks in which gold has lost 5% or more, so our recent decline is not new.

More importantly, it is reassuring to note that gold eventually overcame the four previous declines of 5% or more. In other words, the decline came after gold had already made a new 27-year high. The ability to recover from sharp, short-term corrections is a very clear indicator that gold is still in a bull market.

Likewise, silver retraced a previous-week's breakout from the pennant consolidation pattern it had been forming since last year. Despite this setback, silver remains bullish, too.

When a correction occurs, it's always prudent to see if anything meaningful has changed. Did any of the factors driving the precious metals higher for the past several years suddenly disappear in the past week? No, nothing has changed.

If anything, there is now another reason to own gold. OPEC has inadvertently made clear its internal disagreement about continuing to accept dollars in payment for their oil exports.

OPEC's 'Secret'… Revealed

On Nov. 16 - after the gold market had already closed - Bloomberg News, Reuters and Yahoo! News all reported the discussions of an OPEC meeting that the ministers had intended to be held behind closed doors. Instead, it was accidentally broadcast on closed-circuit television to reporters in the media room.

According to Bloomberg, "Saudi Arabia, the world's largest crude oil exporter, rejected a proposal by Iran and Venezuela to discuss the weak dollar at this weekend's OPEC summit in Riyadh, saying it didn't want the U.S. currency to 'collapse.'"

A Reuters article published by The Guardian in the United Kingdom quotes Prince Saud al-Faisal, Saudi Arabia's foreign minister as follows: "My fear is that any mention that OPEC makes of studying the issue of the dollar, will in itself have an impact... Just indicating that we have charged finance ministers with studying this issue... would mean a decision taken by OPEC would have the opposite effect and the media would pick up on this point... And then perhaps we would find that the dollar had collapsed, instead of us having done something in the interest of our countries."

Yahoo reproduced an AFP news report, stating that "Iran's Foreign Minister Manouchehr Mottaki said in a written proposal that a final declaration by OPEC leaders, who arrive here Saturday for a two-day summit, should express concern by member states over the fall of the U.S.dollar. Reacting to the request... Prince Saud... warned that mentioning the falling dollar could lead to the 'collapse' of the U.S. currency... Member states should express concern over 'the continued depreciation of the U.S. dollar' in the final declaration."

The report on Yahoo! went on to quote Prince Saud as saying: "This is a sensitive issue. It will cause the dollar to drop further, thus complicating the problems we are facing from the dollar's fall." After 30 minutes, someone became aware of the gaffe, and an OPEC official turned off the closed-circuit TV feed.

Nevertheless, we learned enough. We already know about central banks and savvy investors diversifying out of dollars, and we now know that OPEC is talking about it, too.

Stabalizing Oil's Rocketing Price

If it wants a stable oil price, which is its stated aim, then OPEC should be pricing oil in terms of gold. When viewed in terms of gold, the price of oil has barely changed.

With other Gulf Cooperation Council countries now reviewing their currency pegs to the dollar, as Kuwait has done, they should be thinking about defining their currencies as a weight of gold rather than some basket of constantly inflating fiat national currencies. Linking to gold would bring a level of price stability to the region not available from linking to any basket of currencies.

Oil was effectively priced in terms of gold until 1971, when the dollar was still on the gold standard.

Will OPEC abandon the dollar and once again price its crude oil in terms of gold? Ministers have given clear reasons [and desires] for doing so, which is another good reason why we should own gold. [For some specific profit plays with gold, check out our recent Money Morning Investment Research Report, "The Five Top Plays to Profit From the Gold Boom." To access the report, ,please click here. Like our other reports, this one is free of charge.]

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