Yes, jg, your method makes sense, and I came to a similar result when I calculated how much of our liquid dollar assets (cash, CDs, bonds) one would put into gold. That is exactly the most important variable, and that can be anywhere between 0% and 100%. Are we totally trusting paper money and hold 0% gold. Probably not since there is clear precedent to the contrary. Are we totally losing faith in politicians to manage paper money honestly, then we will want to hold towards 100% in gold and demand a gold standard.
I think a number of 20% is reasonable (again, just talking about dollars we own, not our other assets) which would put gold much higher than it is now. It is very realistic that in times of rising inflationary fear that this ratio trends continuously up, e.g. from estimated (?) 5% to 30%. That’s one of the major reasons why gold can easily go up a factor 6 from its bottom (plus of course another 7% annualy or whatever dollars are printed during this time frame). Can the ratio go towards 100% and give another factor 3 (making it a total of 18 times up)? Sure, who knows, if we regard nothing as valuable as gold, but then it clearly becomes more risky. I rather take the easy gain in the beginning than panic later and try to get in at a price of about 3 times ($2000) from now.
Everyone has to answer for himself how much he trusts the government and paper, and what the other (clueless?) participants will think in a few years.
By the way, the production cost is so low because there is presently not so much demand. If the demand multiplies due to the above factors, there won’t be enough production at low prices, so the marginal price to meet this demand will come from additional mines at much lower grade, and then the production cost will be a muliple of now. (Think of some Saudi oil at <$5/bbl and the tar sands at $50/bbl total cost. That's why oil is $60 and not $6.)
