What Is A Fair Price For Gold?

Analyst, Author, and Owner of Kelsey's Gold Facts
May 3, 2021

fine goldIn other words, how much is gold really worth?

If we believe that gold is money, then we likely will have a different opinion or expectation than someone who sees gold as an investment; or someone else who deems gold to have no useful value.

If we don't believe that gold is money, then we are saying that something else is. That something else, practically speaking, is fiat, paper currency issued by a government or central bank (dollars, euros, yen, etc.).

HOW MUCH IS MONEY WORTH?

With that in mind let's rephrase our original question. In other words, "How much is money worth?" In the simplest of terms, money is worth whatever it can be exchanged for. The value of money is in its purchasing power.

With that fundamental understood, then the logic is reasonably simple. Gold (or any other money) is worth what we can buy with it.

So, what can we buy with it? And how do we know that the value of our gold/money is realistically priced?

We know that gold is currently priced at $1765 per ounce; so the value of gold today is what we can buy with one thousand seven hundred and sixty dollars.

But is $ 1765 dollars per ounce realistic? Does it represent fair value? Are there reasons why we might expect that price to rise or decline to any substantial degree that would influence our choice to hold money in gold vs. US dollars?

In order to diffuse any arguments about whether or not gold is money, let's go back to a time when both gold and the US dollar circulated as money, were freely convertible, and were equal in value.

A century ago, both gold and US dollars were legal tender, and interchangeable. Either was convertible into the other at a fixed price. A one ounce (.97 ounces) gold coin was equal to twenty US Dollars and vice-versa (the official gold price was $20.67 per ounce, which multiplied by .97 ounce of gold in a gold coin equals $20.00).

With the current price of gold at $ 1765, some would be tempted to say that the value of gold over the past one hundred years has increased by eighty-four hundred percent. But that would mean that one ounce of gold today will buy eighty five times as much as it would a hundred years ago. We know that is not the case.

The specifics are two-fold: 1) Gold gained in price by eight-four hundred percent relative to the US dollar. 2) The US dollar declined by more than ninety-eight percent relative to gold.

GOLD AND US DOLLAR PURCHASING POWER

Now we need to know how both gold and the U.S. dollar fared in absolute terms regarding purchasing power. You can read about that in my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold.

The results are clear. Gold has maintained its value, and even increased its purchasing power in absolute terms, over the century-long period under consideration.

What we don't know is the extent to which the current price of $1765 per ounce reflects accurately the effects of inflation that have led to our current situation. More specifically, how much purchasing power has the US dollar lost? Is it ninety-eight percent or less; ninety-nine percent or more?

The current market price for gold of $1765 indicates a specific loss of 98.75% in US dollar purchasing power. A ninety-eight percent decline in the value of the US dollar translates to a gold price of approximately $1,000 per ounce. If the decline is closer to ninety-nine percent, then the gold price should be closer to $2,000 per ounce.

In August 2011, gold peaked at almost $1900.00 per ounce. That indicates a loss in purchasing power of the U.S. dollar closer to ninety-nine percent.

Nearly four and one-half years later, in January 2016, gold traded as low as $1040.00 per ounce. That price indicates a decline in U.S. dollar purchasing power closer to ninety-eight percent. A ninety-eight percent decline in U.S. dollar value equates to a fifty fold increase in the gold price (100 percent minus 98 percent = 2 percent; 100 percent divided by 2 percent = 50; $20.67 per ounce times 50 = $1033.50 per ounce).

Last August (2020) the gold price peaked at $2060. That indicates a loss in purchasing power of the U.S. dollar closer to ninety-nine percent, which translates to a one-hundred fold increase in the gold price (100 percent minus 99 percent = 1 percent; 100 percent divided by 1 percent = 100; $20.67 per ounce times 100 = $2067.00 per ounce).

CONCLUSIONS

1) The US dollar has lost between ninety-eight and ninety-nine percent of its purchasing power over the past century.

2) Gold is fairly/realistically priced at anywhere between $1000 and $2000 per ounce.

3) Further increases in gold's price will come only after further significant and apparent losses in US dollar purchasing power.

Items for consideration that could have a substantial impact on the US dollar include 1) new and unexpected actions by the Federal Reserve; 2) a clearer picture of the enormity of the Fed's balance sheet; 3) accelerated, delayed effects of inflation previously created by the Fed; 4) a credit implosion; 5) Fed's reaction to a credit implosion; 6) Deflation and Depression.

Some items, or variations of them, can affect the value of the US dollar positively, which is why you need to keep your eye on the dollar, and not the specific event.

(See here for broker reviews, including Exness.)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED!

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Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner. His website, Kelsey's Gold Facts, contains self-authored articles written for the purpose of educating and informing others about gold within a historical context. In addition to gold, he writes about inflation and the Federal Reserve.

Kelsey is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED! 

Kelsey Williams is available for private consultations, public speaking, and interviews at [email protected]

The 1849 Gold Rush sped up California's admission to the Union as the 31st state in that year.

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