Understanding the Petrodollar and How it Affects Precious Metals

It is one of the great ironies of the modern world that the way of life for so many of the world’s people hinges on the fate of the petrodollar, and yet so few people in the world have a good understanding of its true significance.

Origins of the Petrodollar

The concept of the petrodollar arose shortly after the 1971 de-coupling of the US dollar from the gold standard. Since the end of World War II, the US dollar had been designated the world’s reserve currency – a status it earned by virtue of being literally the only major economy on earth not destroyed by the global conflict.

The agreement which established the US dollar as the world’s reserve currency meant that the United States would back the dollar by exchanging it for physical gold when requested to do so by any other country wishing to exchange its dollars. Many countries of the world were dismayed by what they perceived as fiscal irresponsibility by the US in the years after the Great War, especially in ventures like the Vietnam War, which cost the US a staggering $200 billion.

Because so many countries lost confidence in the US dollar, they began exchanging their dollars for physical gold. Whereas after World War II, the US had held roughly 80% of all the world’s gold in its reserves, a huge run on those reserves made it apparent that the US would no longer be able to keep exchanging dollars for gold at the same rate. At that time, President Nixon made the decision to de-couple the dollar from the gold standard, thereby negating the agreement signed by America after World War II.

Rise of the Petrodollar

In a masterstroke of political ingenuity, the US at the same time created new artificial demand for dollars by striking an agreement with the oil-producing countries which required that all oil purchases be made in dollars. Since all countries were then required to purchase dollars before making oil purchases, the international demand for dollars soared, and as it did the American economy mushroomed right along with it.

This then, was the petrodollar – that artificial demand for US dollars created by the need to purchase oil, which of course every nation on earth needed to do. It became an international juggernaut that bolstered the US economy to lofty heights, but the flaw in the plan has always been apparent – it depends on all nations continuing to make their international oil purchases in dollars.

In the past few years, chinks have begun appearing in the armor of the petrodollar, as some countries have broken away in defiance of it and made oil purchases in other currencies.

How the Petrodollar Affects Precious Metal Prices

It’s clear to most governments of the world that the US dollar now has little intrinsic value of its own, since it is backed by nothing at all. What does have real value is physical bullion like gold and silver, and in the absence of a strong reserve currency for the world, these are the safest commodities to have in reserve.

Nations trying to protect themselves from the looming petrodollar collapse are rushing to make purchases of gold and silver for their own reserves as an economic hedge. This rabid demand for gold and silver all around the world continues to drive up precious metal prices at an ever-increasing rate.

As the petrodollar system weakens day-by-day and month-by-month, many nations seek the certainty of an economic commodity with real value, so precious metal purchases are likely to increase, and prices are likely to rise in these dying days of the petrodollar.