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.
The Synod is a conspiracy of 8 large international banks who seek to control gold, stock, bond and commodity markets all over the world. Jack Severs runs for his life when he learns too much, as the most sophisticated surveillance system ever built is deployed to track him down. As the ever-tightening noose closes, he struggles to uncover evidence to save himself and his world from collapsing! An exciting, fictional, fun and educational thriller about the banking cartel, and how it affects business, politics and daily life.