Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

Methods for Estimating the Price of Gold

Commodities / Gold & Silver Oct 10, 2008 - 03:46 AM GMT

By: Mike_Hewitt

Commodities Best Financial Markets Analysis ArticleThere are several different approaches to calculating a theoretical price for gold. The purpose of this essay is to calculate this figure using two different methods. For each, the total ounces of gold above ground will be divided by:


  1. The total amount of currency (physical paper money only)
  2. The aggregate sum of published M1 money supply (primarily currency and demand deposits) figures from the world's central banks

Amount of Aboveground Gold

According to GFMS Ltd , the aboveground stocks of gold at the end of 2007 were 161,000 tonnes. Jewellery makes up the largest component of this inventory. Much of this is in the form of 'monetary jewellery' for which the value is based upon the content of gold rather than its artistic value.

According to the September 2008 release from World Gold Council the total official gold holdings of the world's central banks and vaults of the International Monetary Fund and Bank of International Settlements is 29,783.9 metric tonnes, representing over eighteen percent of the total inventory.

Composition of the 161,100 Tonne Aboveground Gold Inventory

An average of an additional 2209 tonnes of gold (minus producer hedging) was added on an annual basis over the last five years. This represents a 1.4% annual inflation rate of the gold supply. The known reserves of world mining companies are estimated to be another 45,000 tonnes.

Amount of Currency in Circulation

A tabulation of the major currencies in the world converted into USD as of Oct 8, 2008 amounts to US$3.8 trillion. If we include the value of all demand deposits (approximated by using official M1 money supply numbers) the volume of the money expands to $18.4 trillion. The most recent official figures available were used for determining the values of the different currencies as shown in the table below.

Economic Area M0 ($US Billions) M1 ($US Billions) Date
EU 888.17 5007.46 Aug-08
US 775.40 1389.3 Aug-08
Japan 712.11 4700.03 Sep-08
China 443.86 2231.72 Dec-07
Russia 145.43 201.83 Jul-08
India 129.64 232.32 Jul-08
UK 87.93 1710.52 Aug-08
Canada 45.99 364.94 Aug-08
Poland 43.12 139.71 Aug-08
South Korea 41.25 218.78 Apr-08
Mexico 37.61 100.28 Aug-08
Switzerland 31.82 227.39 Aug-08
Australia 28.97 164.64 Aug-08
Ukraine 26.93 38.97 Aug-08
Taiwan 24.36 95.18 Aug-08
Brazil 24.36 49.45 May-08
Thailand 24.09 28.9 Jul-08
Argentina 23.08 37.48 Sep-08
Turkey 22.51 43.45 Sep-08
Saudi Arabia 20.42 111.33 Aug-08
Egypt 19.87 32.01 Dec-07
Indonesia 19.65 47.68 Jul-08
Czech Republic 18.26 88.62 Aug-08
Sweden 15.02 195.14 Aug-08
South Africa 12.55 81.13 Aug-08
Pakistan 12.40 44.84 Sep-08
Singapore 12.03 49.81 Jul-08
Malaysia 11.54 49.87 Aug-08
Hungary 10.94 32.81 Aug-08
Denmark 9.32 144.13 May-08
Venezuala 8.76 48.45 Sep-08
Colombia 8.39 16.69 Sep-08
Romania 8.34 31.68 Jul-08
Nigeria 8.04 36.14 Aug-08
Philippines 7.76 18.83 Mar-08
Norway 7.25 123.2 Jul-08
UAE 7.06 49.46 Dec-07
Israel 6.78 18.79 Dec-05
Slovakia 5.84 26.18 Jul-08
Bulgaria 5.45 14.63 Aug-08
Peru 5.37 7.61 Aug-08
Bangladesh 4.89 8.72 Jul-08
Chile 3.58 16.53 Dec-07
Lithuania 3.24 10.21 Aug-08
Kuwait 2.93 17.38 Aug-08
Sudan 2.16 4.97 Dec-07
Belarus 2.01 4.83 Sep-08
Latvia 2.00 7.10 Jan-08
New Zealand 1.85 14.14 Aug-08
Sri Lanka 1.36 2.47 Dec-07
Lebanon 1.24 2.44 Jul-08
Estonia 1.08 6.93 Aug-08
Moldova 0.71 1.13 Aug-08
Iceland 0.12 4.05 Aug-08

 

lease note that some of the data is less current (i.e. latest data for China is from Dec 2007) or simply unavailable (i.e. Iran).

A previous analysis of the 25 largest economic regions of the world in July 2008 suggests an annual inflation rate of 6.6% for the paper money.

There is no limit to the amount of currency a country can issue, but its value is determined by the public's collective confidence. The severe socio-economic destruction caused by hyperinflation occurs when this value approaches zero. A list of failed currencies can be found here .

Estimating a Price for Gold

A troy ounce is 31.1 grams, thus the 161,000 tonnes of gold is equal to 5,176 million ounces of gold. Dividing the total amount of currency (US$3.8 trillion) by 5,176 million ounces gives us a figure of US$738 per ounce.

The chart below shows the composition by currency of such a comparison.

Breakdown of US$738 Gold by Currency

The next chart indicates the break-down in price for an ounce of gold by dividing the currency and demand deposits of the world ($18.4 trillion) by the estimated number of aboveground gold (5,176 million ounces).

Breakdown of US$3545 Gold by Currency and Demand Deposit Cash (M1)

Extrapolating the present inflation rates for both gold and paper currency produces an annual price increase of 5.2% (6.6% paper inflation - 1.4% gold inflation) for the price of gold.

Conclusions

These two analyses are meant to provide a measure of comparing the amount of gold in the world to the amount of paper money using published official sources. The two measures of money used are themselves quite limited in scope.

Currency as physical paper is the most restrictive form of measuring the money supply and the most straightforward method conceptually. It is generally accepted practice to also include demand deposits when discussing money supply, as this is a form of money available to the depositor upon demand. Savings accounts are sometimes considered as money, but not always, as it may be argued that the bank (in theory) may demand some time to acquire physical cash to redeem a withdrawal.

Obviously the inclusion of other broader forms of money (various instruments of savings deposits, money market deposit accounts, repurchase agreements, money mutual funds, etc) would further increase the price of gold in such a comparison.

Whether such comparisons are of value beyond that of curiousity, I leave to the discretion of the reader.

By Mike Hewitt
http://www.dollardaze.org

Mike Hewitt is the editor of www.DollarDaze.org , a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies.

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

Mike Hewitt Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules