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There are many people who allege that, because gold does not pay interest or dividends, it cannot be accurately valued, like a stock or bond. That is not true. It is actually easier to calculate the fair market dollar value of gold than to value any other asset. We simply need to step back in time in order to find our answer, and then employ some math.

The Bretton Woods Agreement was signed in July 1944, when the world was on a quasi-gold standard. The United States of America had accumulated a vast majority of the government-owned yellow metal during World War II. Because no other nation had much gold, it was decided that America’s gold reserve would be indirectly used by all nations.

They all sat down at the negotiating table and hammered out an agreement, setting out a workable price of gold. Before doing so, of course, the leading economists of the day did careful mathematical calculations and concluded $35 per ounce, which had been set by the Roosevelt administration in 1933, was a sustainable international gold price.

Under Bretton-Woods, whenever a foreign nation wanted gold, it could turn in exactly thirty-five US dollars and the American Treasury would pay out exactly one troy ounce of gold. The $35 price was deemed accurate, not only because the Roosevelt administration had set the price there during the Great Depression, but also because it took into account the substantial rise in the monetary base of the USA between 1933 and 1944.

The Bretton-Woods exchange standard was basically a calculation of the number of dollars that existed in the world against the total weight of gold in US reserves. The number of dollars is known as the so-called “monetary base”. It is defined as the total amount of a currency circulated in the hands of the public plus commercial bank deposits held in the central bank’s reserves.

According to the St. Louis branch of the U.S. Federal Reserve the monetary base on July 27, 1944 was $26.922 billion. On June 22, 2016, the monetary base had risen to $3,873.241 billion ($3.9 trillion). To arrive at the fair value of gold, we first calculate the extent to which that monetary base has increased. For convenience, let’s call it the “gold value multiplier”.

All we need is a simple mathematical equation, where GVM is the gold value multiplier, MB2016 is the monetary base existing on June 23, 2016, and MB1944 is the monetary base existing on July 27, 1944.

GVM = MB2016/MB1944

GVM = $3,873,241/26.922

GVM = 143.8689919025332

Once we arrive at GVM, it is easy to calculate the fair value of gold, where FVG, is the fair value of gold, and PG1944 equals the price of gold in 1944.

FVG = PG1944 x GVM

FVG = $35 x 143.8689919025332

FVG = $5,035 (rounded to the nearest dollar)

As you can see, the fair value of gold, on June 23rd, 2016 was a little over $5,035. One might add slight alterations based on the increase in gold mining vs. the increase in population, and the fact that the public demand for gold has soared, whereas government demand for gold has fallen.  But, the modifications would end up changing fair market value by a few hundred dollars, not more. We must still ask why is gold now selling for only $1,347 per troy ounce?

The reason might be that the human heart has become less in love with the yellow metal.  Are people less interested in buying gold now than in 1944?  Not very likely. First of all, starting in 1933, it was illegal in most western nations, including the United States, to buy any gold bullion at all. During the Great Depression, on a claim of  “economic emergency” and the need by the central government to expand its gold reserves in order to expand the dollar supply, all privately owned gold bullion was confiscated. The same thing happened in a number of other western countries.

Even if western appetite for gold has diminished over the years since 1944, which it has not, there is also the world as a whole. With the entry of nations, like China and India, traditionally oriented toward purchasing precious metals, into the ranks of quasi-developed economies with money to spend, the demand for gold has gone way up, not down. So, why isn’t gold selling for at least its fair value, as calculated based on Bretton-Woods, when it ought to be selling for more than that?

The reason is simple. There has been a decades-long extensive manipulation of gold prices that has been subsidized by various western governments, especially the USA, discussed in more detail here.  So what, you might ask?  Isn’t all that nothing more than tin foil hat material?  Even if it is true, why would an asset that is being subject to downward price manipulation be attractive as an investment? If the full faith and credit of the US government stands behind gold manipulation, there is nothing you do about it, except elect new leadership.

Why, then, do I even bother to make this calculation?  The reason is as simple as the calculation itself. The vast difference between the fair value of gold and the current prices caused a huge gap between supply and demand, which the “supplier of last resort” (a/k/a US Treasury) is filling every year. You can read more about how they are doing that here. What is important, however, is that the type of massive drain on US gold reserves cannot be maintained without exhausting reserves. After that, it’s “game over”.

In other words, regardless of the politics of the Obama administration, gold prices must now go up. Indeed, it is a very opportune time for the US Treasury to allow gold prices to rise dramatically. Right now, the price increase can be blamed on so-called “populists” who support things like “Brexit”, rather than on the true reason, which is economic mismanagement, long term deficit spending and money printing. In the long run, the price of gold must return to fair market value, regardless of what short to medium term antics are employed by market manipulators.

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  1. In 1944, the $35/oz gold price was based on US Gold reserves at that time. Your calculations assume that US Gold reserves have neither increased nor decreased since 1944. If 2016 US Gold reserves are 1/2 today of what they were in 1944, you would have to double your number to $10K and if reserves are double today, you would have to halve your number to $2.5K. If as most people believe that US reserves are more likely 1/10 of what they were, then the price would be closer to $50,000 USD (said otherwise, 1oz of Gold would buy you $50,000 USD).

    Furthermore, the price of Gold cannot be based just on US reserves. If some country were to dig up a 1 million metric ton meteorite of near sold gold, you would see everyone running to Silver pretty quickly. Hence annul mining production must be taking into consideration for this calculation, as should world population, which affects consumer demand.

    1. I haven’t just divided the amount of US dollars by the tonnage of gold because gold has been demonetized. Instead, I tried to negate the shift from governmental to private demand by simply multiplying the price by the difference in the US monetary base. Dollars are still, for example, convertible into gold, but generally speaking, this is now done in the private market, rather than by the government.

      The increase in the overall stock of gold, and the amount of mined each year since 1944, has been just a bit lower than the increase in world population. Population v. mining trends would argue for a slightly higher fair market value than the one I’ve listed above, but not by 2 to 3 times. What might bring prices to the 5 figure range is demand in India, China and other parts of the world. However, that demand will tail off if the price goes that high, so as soon as we get into a few thousand dollars per ounce, China and India demand will fall dramatically, so I still don’t see the fair market value in the 5 figures, absent very unusual circumstances, like an economic implosion.

      1. I appreciate ypour reasoning, but what if we tried this: Calculate the GVM by dividing the global monetary base in 1944/ Global Monetary base in 2016 = gold price in 1944/ fair value today.

        Cross multiply and you get : base 1944(fair value today)= GMB2016( $35) .

        solve algebraically. Your thoughts?

  2. The official figures of US gold at the end of WWII were about 22,000 tons, of which only 8133 tons remain today. Using these and your base money figures, this gives a 1944 price of $38/oz, and a 2016 price of $14,800.
    However, if as some claim the US has less gold than that, the 2016 price goes up from there.

  3. Interesting comments: Until enough people get properly educated on the true value of gold and its relation to purchasing power compared to fiat currencies there will be insufficient DEMAND too offset the establishment propaganda against gold.
    Stated another way, what SHOULD BE reality mathematically will not become so as long as the banker created Ponzi scheme called the Federal Reserve remains in a position of dominance. That can only be accomplished when enough voters finally decide to oust the corrupt politicians protecting this monopoly in favour of free market leaders willing to back honest money, supply vs demand will take care of the rest. It may take years, but yes $10,000 per oz. gold is entirely feasible which in turn would send a lot of small investors into silver and bring the ratio between the two to a more historic level of 10 to15 X 1 instead of the current 70 X 1, in other words silver can be a faster, cheaper speculation.

  4. The interesting fact which nobody comments on is that mine production of gold is at an all time high of roughly 3,500 tons per year. How is that possible if the Fed and the US Treasury suppressed gold from its fair market value of roughly $5,000 to roughly one quarter, that is $1350 ? That is a serious question. One would assume that at such a massive suppression of the gold price, the production of gold would be going down with many mines going out of business. In reality the opposite happened. Rising gold production means that gold can still be produced profitably at these low prices.

    Personally, I prefer low gold prices persisting forever. That would mean that I could continue to accumulate ounces of this beautiful metal forever. A high price of gold, say $5000 or more, would make gold very unaffordable for people on a regular salary. Only people who already accumulated many tons of this metal could possibly welcome such high prices.

    1. Mine production is expected to fall significantly over the next few years unless there is a very large increase in price. That is because all the easily and cheaply mined gold, based on the current technology, has already been taken. What is more important, however, at least this year, is that the current level of production when the price was in the neighborhood of $1,200 per ounce, was going to result in a market deficit of supply in the amount of over 1,600 tons of gold in 2016. It will be somewhat less, now, given that the price is up, and what the actual deficit will end up being will be determined by how high the price of gold rises this year. As the price goes higher, more paper gold will be sold to momentum oriented speculators, but physical gold demand will diminish until supply equals demand. I had previously stated that this was likely to happen at somewhere between $1,600 and $1,700 per ounce, because that is where the demand and supply evened out in the past. I believe, however, that the number now, will be higher than that.

  5. “The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.”
    Alan Greenspan

    Doesn’t matter what the actual price of gold is. The U.S. government I know is not about to allow stackers in the U.S. to cash in on any substantial rise in price.

  6. To calculate the correct price for Gold today according to the BWA just take the amount of Gold covering the BWA where every nation was assured the conversion of Dollars for Gold.
    The coverage ratio at the time was something like 87%, but to be generous let’s say their intent was only a 75% coverage and the stock of Gold today to cover their monetary base is the official number then that gives a price/oz of $10,150.

    Nothing else matters as the BWA enshrined Gold as an official asset backing their BW financial system to entrap all other nations in this most egregious of all systems ever devised.

    Now of course all the US official Gold has gone, been leased, sold, stolen and hocked off by the bankster cabal from the Fed, WS, US Treasury cum ESF, BIS et al.

    But nonetheless, Gold is still and will always be, the ultimate form of money and when the fiat house of confetti finally collapses then there will only be gold, and silver, left as money!

    And the price will be reflected in its purchasing power, which Gold has maintained over millennia. and will so into the long distant future, regardless of all the banksters’ machinations and attempts to destroy it as a monetary asset.

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