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Just adding a bit to Chris’ post, it’s McD who has ”the causation roughly backward.” It’s not input prices that determine final output prices. It works the other way: Final money prices (in this case, of gold) are determined by subjective final money demand. Rising/falling demand for final products raises/lessens demand for inputs used to produce those final products.
For example, house prices weren’t rising during the housing boom because steel, cement and building sand costs were going crazy. Rather, steel, cement and building sand prices were being bid up by contractors who expected their final products to fetch much higher prices as home-buyers juiced their buying power with fractional bank credit.
This is why when people say that house prices can’t fall because it costs x to build them, they get it totally wrong. The only way for the input prices to fall is if final monetary demand falls.
Oil prices clearly do have their own independent final demand, which adds complexity to the issue. Prices are highly complex. But to say that gold and oil prices have a roughly consistent ratio only because oil is an input into gold production is to say essentially that the gold price would have risen irrespective of final subjective demand. This is not true at all. If final subjective demand for gold dropped to zero, the price of gold would drop to zero – it would become worthless to us – no matter how much it cost to pull out the ground. On the other hand, even if oil prices plummeted due to say a huge new oil discovery, if gold demand remained the same or increased, there would be no reason why gold prices should necessarily fall.
In addition, oil is used in far greater quantities for non-gold production purposes. Rising oil prices due to final fuel demand would if anything displace income that could otherwise be spent on gold and would actually cause gold prices to fall. But notice how we don’t observe this. Why? Because as Chris made clear, “it is the exchange ratio of the rand to both gold and oil that is going down because paper monies are being debased, and that this is why the price of both gold, oil, wheat, soybeans, etc. have all increased since 1971 in paper money terms.“ In other words we tend to observe roughly ‘stationary’ ratios of commodities with each other, but ‘non-stationary’ ratios of commodities with money, because money is being constantly and permanently debased by politicians. Gold money prices can rise EVEN WHEN oil money prices rise because rising oil prices are not displacing demand from elsewhere, they are merely the praxeological result of rising money supply.
This also shows the corollary: falling oil prices, due to say the discovery of new, more efficient energy technology, would release income to be spent elsewhere, and gold prices could actually rise.
Of course, what a high final price and low input prices would subsequently do is entice new producers into the market, raising gold supply. This would, all else equal, begin to depress prices. But increasing supply in this way is a separate issue from input prices determining final prices at McD asserts. In fact, as new entrants enter the market and bid for more inputs while at the same time increasing supply and lowering final prices, we would actually see input prices RISING and final prices FALLING at the same time, squeezing profit margins.
In fact the very fact of profit margin cycles shows that input and final prices OFTEN move in different directions, but market forces tend to restore their exchange ratios over time (unless there is a major technological shift), but not in the way McD asserts.