Potential End of Dollar-based Oil Deals Helps Gold Shine

By Myra P. Saefong, MarketWatch

Oct. 6, 2009, 5:07 a.m. EDT

TOKYO (MarketWatch) — Growing speculation over the potential end to
dollar-based trading in the oil market may be part of the reason gold
prices have rallied beyond $1,020 an ounce to stand near their highest
level in 18 months.

And the strength was kept even as several top officials, including
Saudi central bank chief Muhammad al-Jasser, denied the report.

Gulf Arab states, along with China, Russia, Japan and France, are
planning to put an end to dollar-based trading in the oil market,
according to an exclusive report published Tuesday in the U.K. by The
Independent.

“News on gold’s expected future role in oil transactions between these
trading partners has sent the price past $1,020,” said Peter Spina,
chief investment analyst at GoldSeek.com.

In place of the greenback, the nations plan to use a basket of
currencies, including the Japanese yen and Chinese yuan, the euro, gold
and a new, unified currency planned for nations in the Gulf
Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and
Qatar, the report said.

The Independent said the plans were confirmed by both Gulf Arab and Chinese banking sources in Hong Kong.

Several top Gulf central bankers immediately dismissed the talk, and
the vice chairman of China’s central bank made no mention of such a
move in a speech.

The report is “absolutely bullish,” for gold, said Peter Grandich, a
metals writer at Agoracom. “I’ve not see gold’s fundamentals this
bullish in years.”

The December contract for gold, the most-active on the Comex division
of the New York Mercantile Exchange, closed Monday with a gain of
$13.50, or 1.3%, at $1,017.80 an ounce. By the morning in London,
December gold was up $2.80 to $1,020.70.

In mid-September, futures prices had climbed past $1,025 to hit a fresh
18-month high. The record intraday price for a front-month gold
contract is $1,033.90, set on March 17, 2008.

Many analysts had attributed the gains Monday to higher demand in the face of more weakness in the U.S. dollar.
See Metals Stocks.

But, as Spina pointed out, trading gold and other currencies in
exchange for oil would “establish gold as a recognized medium of
exchange, returning it a step closer to its role as money on a world
trade system.”

So the price of gold “should continue to find upward price pressures on this news,” he said.

At the same time, “the domination of the U.S. dollar is further removed
and really, it has been the pricing of oil in dollars for trade that
has given it a huge boost in its demand globally,” said Spina.

If the dollar is presently being used to transact oil between these
nations, then they must use many billions of dollars to do so, he
explained.

“If they will switch away from the U.S. buck, then all that demand
disappears, the need for the U.S. dollar diminishes, and its value
should reflect this,” he said.

At last check, one U.S. dollar bought 88.97 Japanese yen, down from
89.49 yen in late New York Trading Monday. One euro bought $1.4726, up
from $1.466.

“Transacting in gold will boost demand [for gold] as the U.S. dollar’s role diminishes,” said Spina.

All in all, “this news is certainly bullish for gold’s prospects for further use in international trade going forward,” he said.

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