Put an ingot under the tree

I have a wonderful book, published in 1977 and left by an Arabist great uncle. It is called Oil Sheiks: Inside The Supercharged World Of The Petrodollar, by Linda Blandford, and traces the path of the money that poured into the Middle East and out again during the last oil boom.

It starts with the story of a chauffeur who spent two months one summer in the early 1970s driving a Saudi Arabian prince around in his "brand new Rolls-Royce Corniche". On the day the prince left London, his chauffeur drove him to the airport, checked him in and asked him what to do with the car. "Keep it," was the answer. To the prince, this was "a gesture in keeping with his culture", wrote Blandford, but "to the gaping airline staff it merely confirmed the image of Arabs as idiots with too much money", as did their apparently utterly price-insensitive purchases of central London property and baubles in the likes of Asprey and Tiffany.

This time round, the Arabs have no such reputation. Instead, they are considered to be increasingly savvy investors and part of the market's current game is to try and guess where their oil money is going, so that it can go there too. For the last year or so it has been easy to spot the path of petrodollars just look towards the bubbling stockmarket in Saudi Arabia and the booming property market in Dubai. But now all the easy money has been made there, where will the cash go next? The answer is probably not America. As Stephen Roach of Morgan Stanley points out, Arab holdings of US Treasuries have fallen, not risen, this year, and with the US economy and the dollar at risk as we go into 2006, there's no reason for that trend to change. Some think that much of the money will flow into emerging markets, keeping the Indian boom going, perhaps, and others hope it will find its way into the UK, extending the flood of mergers-and-acquisitions activity that has been supporting stocks over the last few months (the optimists can always find a reason to be bullish, but this isn't a bad one in the short term). However, we can't be certain of any of this.

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One thing we do know is that a big chunk of 2005's petrodollars has piled into the gold market and that there is no reason for this trend to come to an end either, particularly given that as the Opec countries well know gold is historically cheap in terms of oil. The last time the Middle East was so awash with oil, the gold price hit its all-time high. Seems to me that a couple of Kuggerands would make a perfect Christmas present for almost anyone. Failing that, a silver ingot would probably go down pretty well too.