Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Russia Buys 300,000 Ounces Of Gold In March – Nears 2,000 Tons In Gold Reserves - 24th Apr 18
Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - 24th Apr 18
CRYPTOCURRENCY MASTERCLASS #CRY90 - 24th Apr 18
UKGC Set to Make Online Gambling Industry More Risk-Free - 24th Apr 18
Chaos Capitalists Short Countries - How Chanos Got China Wrong - 24th Apr
Artificial Intelligence Defines the Political News Narrative - 24th Apr 18
Stock Market "Oops, They Did It Again" - 24th Apr 18
Fox in the Henhouse: Why Interest Rates Are Rising - 23rd Apr 18
Stocks and Bonds, This is Not a Market - 23rd Apr 18
Happy Anniversary Silver Investors! - 23rd Apr 18
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Gold at $14,172 an ounce?

Commodities / Gold & Silver Nov 14, 2008 - 04:17 PM GMT

By: Brian_Bloom

Commodities

Best Financial Markets Analysis ArticleThere are those who have been arguing vociferously for some years now that the world will be better off under a gold standard.

These people may or may not be correct, but we need to understand the implications of what a gold standard will bring with it.


Some years ago, the Bank Credit Analyst published a chart of the actual gold price relative to the theoretical gold price as derived from the USA 's “Net Liquid Liabilities”.

Theoretically, the BCA argued, if all the liquid assets of the sovereign USA - excluding gold bullion – were sold and the proceeds applied to pay off all the liquid sovereign liabilities, then – because there would be a shortfall – this net number would be the “Net Liquid Liabilities ”. For the USA to remain a solvent entity, they argued, the price of gold per ounce would need to be the net liquid liability number divided by the number of ounces of gold held in the US gold reserves.

(It should be remembered that a US Dollar Bill is a promissory note issued by the US Federal Reserve. It is therefore a liquid liability)

For a period leading up to the late 1970s, the BCA tracked the theoretical price of gold relative to the actual price and found a tight correlation. That's when the world still believed in a gold standard and that's also when the US Fed (and other Central Banks) began to interfere in the gold markets with the objective of deliberately obfuscating/severing this relationship.

So let's take a leaf out of the BCA's book. Just for the hell of it, let's assume that the USA 's liquid assets today equal its liquid liabilities excluding US Dollars in circulation. It would follow, therefore, that the price of gold would need to be the number of dollars in world currency reserves divided by the number of ounces of gold in the official US bullion reserves. (This assumes that the gold is still there. No verification audits have been done for decades.)

Okay, it's a simple calculation:

Step 1: Quantifying the US 's Gold Reserves

According to the World Gold Council, the US 's Official Gold Reserves as reported in 2008 were 8.133.5 tonnes (Source: http://en.wikipedia.org/wiki/Official_gold_reserves )

1 tonne = 2,200 lbs; and 1 lb =16 ounces. Therefore, the number of ounces of gold owned by the USA is 8133.5*2200*16

= 286,299,200 ounces

Step 2: Quantifying the number of US Dollars in world currency reserves

According to the IMF, Global Currency Reserves have been made up as follows: (Source: http://en.wikipedia.org/wiki/Reserve_currency )

Currency composition of official foreign exchange reserves

   '95   '96   '97   '98   '99   '00   '01   '02   '03   '04   '05   '06   '07  
US dollar 59.0% 62.1% 65.2% 69.3% 70.9% 70.5% 70.7% 66.5% 65.8% 65.9% 66.4% 65.7% 63.9%
Euro         17.9% 18.8% 19.8% 24.2% 25.3% 24.9% 24.3% 25.2% 26.5%
German mark 15.8% 14.7% 14.5% 13.8%                  
Pound sterling 2.1% 2.7% 2.6% 2.7% 2.9% 2.8% 2.7% 2.9% 2.6% 3.3% 3.6% 4.2% 4.7%
Japanese yen 6.8% 6.7% 5.8% 6.2% 6.4% 6.3% 5.2% 4.5% 4.1% 3.9% 3.7% 3.2% 2.9%
French franc 2.4% 1.8% 1.4% 1.6%                  
Swiss franc 0.3% 0.2% 0.4% 0.3% 0.2% 0.3% 0.3% 0.4% 0.2% 0.2% 0.1% 0.2% 0.2%
Other 13.6% 11.7% 10.2% 6.1% 1.6% 1.4% 1.2% 1.4% 1.9% 1.8% 1.9% 1.5% 1.8%
  Sources: 1995-1999, 2006-2007 IMF : Currency Composition of Official Foreign Exchange Reserves PDF  (80 KB)
Sources:  1999-2005, ECB : The Accumulation of Foreign Reserves PDF  (816 KB)             v   •   d   •   e        

 

Total Global Currency Reserves in 2007: $6.4 Trillion

Total Allocated Currency Reserves in 2007 (where the makeup is known): $4.1 Trillion

Total Claims in US Dollars in 2007: $2.6 trillion

$2.6/$4.1 = 63.4% (Close enough)

Source: http://www.imf.org/external/np/sta/cofer/eng/cofer.pdf

Step 3: Calculating the Theoretical Price of Gold

(Price of gold required to allow all US Dollars in Circulation to be backed 100% by gold, assuming all other liquid sovereign assets equal all other liquid sovereign liabilities)

$2.6 Trillion/286.3 million ounces

= $ 9,080 per ounce

Of course, this assumes that the “unallocated reserves” in the world's central banks have no US Dollars in them.

If Total World Currency Reserves have the same dollar proportion as Allocated world currency reserves, then the theoretical price of gold would be:

$6.4 trillion X 63.4% = $4.0576 Trillion

$4.0576 Trillion/286.3 million ounces

= $14,172 per ounce

Of course, this assumes that the gold which the US Government claims is in its bullion reserves is still there.

Clearly, what can be argued in respect of the USA can also be argued in respect of all other countries in the world. A world-wide gold standard would give rise to a fixed relationship between the US Dollar and all other currencies – which would also need to be backed 100% by gold.

And the pragmatic question one needs to ask is therefore: If all the gold in the world was being used for the purposes of currency backing, then how would industrial demand for gold be satisfied? Alternatively: What will happen to world industrial demand for gold if the gold price rose to over $14,000 an ounce?

And this, finally, raises a very important philosophical question: Why do we insist that the most important role for gold is currency backing? What if it is discovered that gold has a far more important role to play in, say, ensuring the viability of all biological life? If the gold price rose to a level which became prohibitively expensive, would this not block the development of alternative – and arguably far more important – applications for gold?

The definition of ignorance is when we don't know enough to know how much we don't know. Why does humanity, in its arrogance, keep taking decisions which are calculated to keep us ignorant of our potential? Why does humanity keep insisting that the most important yardstick of measurement of the quality of life on earth is our “material standard” of living?

The financial world is imploding around us as these words are being written. Some might see this as a problem. The author hereof chooses to view it as an opportunity – because the best time to implement change is when the old ways are obviously not working. From my perspective, we are being presented with an opportunity for humanity to evolve beyond our Neanderthal thought paradigms, to a higher plane of co-existence amongst ourselves and relative to other living beings. My reaction: Wow! What an opportunity! Carpe Diem! “Seize the day!”

One way forward is outlined in my novel, Beyond Neanderthal, which can be ordered via www.beyondneanderthal.com . One alternative application for gold is described in some detail in the novel. The source of this information is a combination of the Old Testament and the latest scientific discoveries. The evidence suggests that religion and science are converging.

Is gold valuable? You betcha! It's pricelessly valuable. That's why it became so desirable in the first place, back in the mists of time. But let's not zig when we should be zagging. A move back to a gold standard will be a giant leap backwards for all of humanity.

By Brian Bloom

www.beyondneanderthal.com

Beyond Neanderthal is a novel with a light hearted and entertaining fictional storyline; and with carefully researched, fact based themes. In Chapter 1 (written over a year ago) the current financial turmoil is anticipated. The rest of the 430 page novel focuses on the probable causes of this turmoil and what we might do to dig ourselves out of the quagmire we now find ourselves in. The core issue is “energy”, and the story leads the reader step-by-step on one possible path which might point a way forward.  Gold plays a pivotal role in our future – not as a currency, but as a commodity with unique physical characteristics that can be harnessed to humanity's benefit. Until the current market collapse, there would have been many who questioned the validity of the arguments in Beyond Neanderthal. Now the evidence is too stark to ignore.  This is a book that needs to be read by large numbers of people to make a difference. It can be ordered over the internet via www.beyondneanderthal.com

Copyright © 2008 Brian Bloom - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Brian Bloom Archive

© 2005-2018 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