The world’s financial markets have been experiencing a perfect storm that has lead in recent days to the surge of oil and gold prices. There are several elements to the storm.

The first and perhaps most compelling is the rumor of the Arab Gulf countries planning on decoupling the dollar from oil and creating their own regional currency with which to denominate oil. Robert Fisk broke this story in the UK paper, The Independent yesterday and despite harsh denials by the Arab Gulf leadership, all signs point to a long term plan to denominate oil in a new currency.

Another reason relating to the Middle East region is the threats of sanctions and military action towards Iran, a country that sits on the largest oil reserves in the world. If Iran was attacked, conventional wisdom says the price of oil would experience record highs in a matter of days.

The third and most obvious element of the perfect storm is the long duration which interest rates have remained at all time lows and the record spending and increase in the US monetary supply that has dictated the low interest rates.

Oil and Gold are secondary however to what is currently happening to the US Dollar. The dollar is poised to plunge and the Federal Reserve, the institution which will ultimately be the culprit of the dollar’s drop, appears to not be willing to give the country the hard dose of reality that would be necessary to save the dollar, namely raise interest rates. Now that interest rates have remained so low for so long the Fed is left with no appealing options. If interest rates were raised, it would lead to an even worse rescission than anything the country has suffered thus far, and if they continue to print the dollar, the dollar will eventually completely collapse.

What the Fed is likely to do is kill the dollar and eventually partner with the IMF, which as become the de facto global central banking institution. The IMF will fund global growth through Special Drawing Rights. The trick will be for the dollar to slowly die as the Special Drawing Rights gradually play a more and more central role in the growth of the world economy. A perfect correlation of the dollar fall and the Special Drawing Rights rise is not likely, so there will be a very difficult transition period when the United States is essentially a country without a currency.