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Oil and the Value of The Dollar






    “From how high, to how low?” is the questioning title of an article in the Houston Chronicle on October 25, 2008, by David Ivanovich. The subtitle reads, “Oil’s boom is now a whimper, as demand slows and prices that once shattered records plunge”. I will summarize the author’s musings as he attempts to answer his own question. However, the price of oil is directly influenced by the value of the dollar. 

    The author chooses, like most, to view the topic from a tail wagging the dog perspective. He states, “Institutional investors and other speculators, who had waded into oil commodities and helped drive up prices to unheard-of heights, have largely fled the scene”. There's no doubt that speculators are out to make money, by buying a commodity like oil (or gold, or real estate) when they think the price is likely to rise and they'll be able to sell for a profit. However, they also help sustain the market for buyers and sellers and provide ways for individuals and businesses to offset risks. Furthermore, easy and plentiful money is the fuel with which all would be investors and speculators use to buy up any commodity traded, thereby driving the price higher. Tighten the money supply and there will be not enough money with which to continue buying. 

    Ceteris paribus: when the value of a good or service falls, the quantity demanded increases, according to the law of demand. Barrels of oil are traded around the world in US dollars. When the value of the dollar goes down, more dollars are required to buy the same barrels of oil. The inverse is also true. When the dollar goes up in value, fewer dollars are required to buy the same barrels of oil, hence the price goes down; money becomes the dog that wags the tail. In this case, the tail is oil. 

    This would explain the bulk of the major price trends in oil. Watch the value of the dollar, and understand how it is strengthened and devalued. Understanding the money supply in relation to goods and services is the key to understanding where the price of oil is headed. Based on the data on the next two pages, it becomes even more apparent that the price of oil is directly influenced by the value of the dollar. In fact, we can say they are the inverse of each other, or move in opposite directions. 

Click the link below to see the data...

Dollar Chart vs. Oil Chart

10 Reasons You Aren't Rich



Thursday March 22, 11:30 am ET
ByJeffrey Strain, Special to TheStreet.com

The reason why you aren't a millionaire (or on your way to becoming one) is really quite simple. You probably assume it's because you aren't earning enough money, but the truth is that for most people, whether or not you become a millionaire has very little to do with the amount of money you make. It's the way that ...

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Why Your Home Is Not the Investment You Think It Is



by David Crook
Thursday, March 15, 2007


Too many people rely on their home as their primary savings strategy. That's a mistake.


Planning your retirement? Don't bet the house on it.


Your home means a lot of things to you, most of them good. Your home gives comfort and protection to you and your family, and it could well embody all your material hopes and dreams.


But houses have become much ...

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Russia leads emerging markets decline

India, Brazil, Turkey, and South Africa also slip, tracking losses in Asia By Polya Lesova, MarketWatch Last Update: 1:39 PM ET Mar 5, 2007 NEW YORK (MarketWatch) — Russian stocks fell sharply once again on Monday, weighed down by declines in commodities and Asian stocks, with most emerging markets — including the other BRIC heavyweights India, China and Brazil — remaining under heavy selling pressure. ...<< MORE >>

Stocks Post Worst Week in Over 4 Years

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Why stocks are likely to move lower over next 6 months

MarketWatchTuesday February 27, 6:28 pm ET By John ShinalSAN FRANCISCO (MarketWatch) — As a reminder to investors, most economists are not predicting the end of the boom and bust cycles that have always been a part of the capitalist system. The latest leg of the current bull market, which had pushed the Nasdaq Composite Index and other broad indexes pretty much straight up since August, has made it easy to forget ...<< MORE >>

Hedging

Although it sounds like it might be the hobby of your neighbor obsessed with his topiary garden full of tall bushes shaped like giraffes and dinosaurs, hedging is a practice every investor should know about - there is no arguing that portfolio protection is often just as important as portfolio appreciation. Like your neighbor's obsession, however, hedging is talked about more than it is explained, making it seem as though it belongs only to the ...<< MORE >>

Stocks Have Worst Day Since 9/11 Attacks

APTuesday February 27, 6:28 pm ET By Madlen Read, AP Business Writer Stocks Have Worst Day Since 9/11 Attacks: Dow Down 416, Nasdaq Drop 97 on Global Market Plunge NEW YORK (AP) — Stocks had their worst day of trading since the Sept. 11, 2001, terrorist attacks Tuesday, hurtling the Dow Jones industrials down more than 400 points on a worldwide tide of ...<< MORE >>

China Market Plunges 9 Percent

APTuesday February 27, 7:45 am ET By Elaine Kurtenbach, AP Business Writer Chinese Stock Prices Plunge Nearly 9 Percent, Biggest Drop in a Decade SHANGHAI, China (AP) — Chinese stocks plunged nearly 9 percent on Tuesday, their biggest drop in more than 10 years, sending ripples through markets from Hong Kong to Australia. Investors who had just lifted the market to ...<< MORE >>

Greenspan Warns of Likely U.S. Recession

APMonday February 26, 8:34 am ET Alan Greenspan Warns That U.S. Economy May Slip Into Recession by End of Year HONG KONG (AP) — Former U.S. Federal Reserve Chairman Alan Greenspan warned Monday that the American economy might slip into recession by year's end. He said the U.S. economy has been expanding since 2001 and that there are signs the current ...<< MORE >>
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