Gold at $14,172 an Ounce?

November 15, 2008

There 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 )

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: 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.

Palladium, platinum and silver are the most common substitutes for gold that closely retain its desired properties.

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