Since June oil has dropped 47%, while the Dollar index during the same time frame has gone up about 12.8%. Oil trades internationally at $57 a barrel. Oil trades in dollars historically, so why are the prices moving opposite directions?
There are two schools of thoughts that have been around for some time now and that have been debated which state that “this will never happen…”, yet with the dollar and oil moving opposite directions it confirms both of these thoughts.
1. Trying To Confirm QE Worked.
The Federal Reserve and our present government administration want us to believe that the Quantitative Easing program has worked in reviving the economy and the debt of our nation is not an issue. With oil prices now much cheaper, I believe the Fed will use this as evidence to say we have no inflation. They will say the cost of living is going down evidence by the drop in oil. Two key Federal Reserve official said earlier this month that the drop in energy prices was a good thing because it should help lift consumer spending. “You can look at how lower oil helps the U.S.economy”, said Quincy Krosby, a market strategist with Prudential Financial.
In fact the Federal Reserve might use this information as a source of support to initiate several more rounds of Quantitative Easing. I am not making this as a prediction, but we could see this possibly happening before the Fed starts raising rates sometime mid next year. Yet something needs to be done to create money for the 1.1 $Trillion spending bill that was recently passed. How will that debt be issued and passed into the market?
2. Oil Is Traded Other Then The Dollar.
If the dollar has moved up then shouldn’t oil have moved up also? Historically and for the most part this has been the case until recently. About the same time, in the month of June this year, the dollar and oil decoupled. Ironically Russia and China, for the first time in history, traded oil not in Dollars but Rubles and Yuan. Since 1974 when the Petrodollar contract came into existence, oil has been priced and traded internationally only in US dollar. The purpose of the Petrodollar was to create a need for using and reserving dollars globally. The Petrodollar system worked for 30 years but now that era is coming to an end.
Historically Oil and Gold move in parallel, yet they have moved a bit opposite too. It looks like the price foundation in gold at the $1200 level is now in place. Many believe 2015 will be a year that gold will rise and we will look back at these levels and say that this price level was the bottom of the market in gold.