Possible Price for Gold?

[admin]

Please correct my reasoning/logic:

5 billion ounces of gold in existence, today, growing at 2% annually (source: 10-K for StreetTracks GLD ETF).

U.S. share of world GDP is 28-43% (entire world vs. developed world) (sources: Federal Reserve and World Bank).

M2 is $6.9 trillion dollars (source: Federal Reserve).

Ignore fact that, today, 64% of gold is used for jewelry and industrial purposes (source: 10-K for StreetTracks GLD ETF); assume that in inflationary times, it will be used 100% for money.

$6.9T / (5B ounces * 43% to back U.S. economic activity) = ~$3,000 per ounce.

If all other countries go to gold to back their economic activity (i.e., use denominator of 5B * 28%), price could reach ~$5,000 per ounce.

Where have I gone wrong on my assumptions/calculations?

[Anonymous]

Is gold at ~$650 per ounce rationally priced?

Replicating the above calculations using M1 (currency, checking accounts, and traveler’s checks) instead of broader M2:

M1 is $1.4T

$1.4T / (5B ounces * 43% to back U.S. economic activity) = $637 per ounce.

Using 28%, instead, in denominator –> $978 per ounce.

Is there some ‘method to the madness’ in gold pricing? Or, is this just ‘happy coincidence’?

[LookoutBelow]

It STILL only costs around 150-170 bucks to mine the stuff…….its hideously overpriced.

A few pounds of that stuff with a healthy slice of XOM stock and you got the makings of a 44 magnum headache……CD's…4.85%, sleep like a baby

[brian_in_la]

“If all other countries go to gold to back their economic activity (i.e., use denominator of 5B * 28%), price could reach ~$5,000 per ounce.”

Huh?

Well, at least that (ex) wedding ring I never got around to hurling with rage into the sea will have some value…I can use it to buy a wheel-barrow to take my greenbacks to the 7-11.

[technovelist]

I don’t think you have gone wrong at all, except for possibly neglecting the fact that the actual intrinsic value of a “dollar” is zero. So any number of “dollars” per ounce of gold could (and probably will) end up being too low.

[sjk]

“It STILL only costs around 150-170 bucks to mine the stuff…….its hideously overpriced.

A few pounds of that stuff with a healthy slice of XOM stock and you got the makings of a 44 magnum headache……CD’s…4.85%, sleep like a baby”

With all do respect, you don’t know what you’re talking about!

[masayako]

“It STILL only costs around 150-170 bucks to mine the stuff…….its hideously overpriced.

A few pounds of that stuff with a healthy slice of XOM stock and you got the makings of a 44 magnum headache……CD’s…4.85%, sleep like a baby”

Your 4.85% CD can’t even beat inflation. Hope you sleep like a baby ‘cos you are in la-la land.

In my humble opinion, Gold is going to reach $700 by Q1 or Q2 in 2007.

[powayseller]

I don’t know so much about gold. I know its value is affected by the value of the dollar and US inflation, but didn’t know it’s affected by our GDP. But even with regard to the money supply, I have a question: since the Federal Reserve is just printing more money constantly, how is the price of gold affected? M3 has been growing at a faster rate in the last year, right?

Gold investors like Eric Janszen and Peter Schiff think gold will rise to thousands of dollars per ounce when the US dollar finally collapses.

Besides your method jg, is there any way to measure the value of gold? Or is it just set by supply/demand of jewelers, industrial companies, and investors?

[Wiley]

from a man a lot smarter then I…

“Gold as it becomes a commodity becomes less valuable. As it becomes a currency gold becomes infinitely more valuable, seeking to balance the Balance Sheet of the USA Inc. in terms of externally held dollar instruments vs. the value of the nation’s holdings of gold. This value was $900 in 1980 and now stands close to $1,650.” Jim Sinclair

[masayako]

I personally agree that Gold the Most Undervalued precious metal in the Market right now. For those who want to know more about the facts about the value of gold vs dollars, here are the links. Just facts, no speculations.

Also, read “The Generational Storm – What You Need to Know about America’s Economic Future” by Kotlikoff and Burns.

Currency in Circulation:
http://www.fms.treas.gov/bulletin/b2006-3uscc.doc

Gold at Fort Knox:
http://www.usmint.gov/about_the_mint/fun_facts/index.cfm?action=fun_facts13

To quote from the “Generational Storm”(pg 224):

“Today, U.S. interest rates are near historic lows, real return are low to negative, and we are exporting record quantities of dollars. Our trade deficit is running 500 billion annual rate. We have a trade deficit with the European Union that’s running at a 100 billion rate. 150 billion rate with China, 77 billion rate with Japan. All three areas import the bulk of their energy, which is priced in dollars.

In the late 1970s, as petrodollaRs piled up in Saudis Arabia and inflation headed for double-digit rates in the U.S., the Saudis made noises about seeking a more secure currency. Nothing happened because there was no place to go. The euro didn’t exist. The yen was seen as not quite big enough to replace the dollar. China was still communist… Basically, there was no alternative to the dollar. That’s one of the reasons the price of gold soared, peaking at $800 per ounce in 1980. Gold is the currency without a government. Given the dismal history of government aroundthe world, many think this quality makes gold superior to any paper currency. Others simply wish for a government willing to backits paper with something more substantial than… more paper.

Divide the amount of U.S. currency in circulation in 1980 by U.S. gold reserves, and you will find that a gold-backed dollar would require gold to be priced at $800 per ounce.

Do the same math today,and U.S. gold reserve would have to be worth about $4,600 per ounce for us to have gold-backed currency. That’s nearly 12 times the current market price of gold.

Is that the true value of gold? We don’t know. Besides that’s the wrong question. The important question is the reverse: WHAT IS THE TRUE OF THE DOLLAR?”

Masayako

[powayseller]

So gold soared in the 1980s because the Saudis bought it with their dollars, instead of buying Treasuries?

I think Roubini is against gold, but he has never explained what else people will flock to once they want to divest from the dollar. What are the choices? Equities, bonds, euros, swiss francs, sterling, yen, renminbi? Gold, silver? All that money will go somewhere else, pushing up the value of that “something else”.

[rseiser]

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.)

[Wiley]

Gold is insurance. Better to buy insurance before you need it, especially when you think you might need it.

Money supply doubling in last 7 years
Incredible amount of leverage partly due to Yen carry trade
War
Entitlement spending now/future
Rolling over of economic indicators
Current Account deficit
Trade deficit
Budget deficit

Maybe I’m wrong but it sure feels like a good time to have insurance.

[Anonymous]

Thanks for the observations, calculations, links, and forecasts, W-, m-, rs, and tn.

I’m in gold mining stocks 100%, and now I’m in on margin, too.

It would be great to be able to keep my money in interest-bearing accounts/the stock market, earning interest or appreciating until right before the stock market crash, but because I have no confidence in my ability to predict short-term market moves, I’m happy to be out prematurely. I miss my 5% interest income, but I sleep better, now, knowing that I don’t have exposure to short-term unpredictable market psychology (i.e., the market dropping before I’m out).

[powayseller]

jg, which gold mining stocks do you own? Nemont Mining? Zeal recommended several in their most recent newsletters, and I could forward you a copy for review (I’m sure they won’t mind if you could be a potential client).

I’m not very good at explaining this gold stuff to my husband. He is reluctant to invest more than a few grand in gold, and is more interested in inverse stock market funds. Do any of you have any compelling arguments or articles I can show him? He says gold can fall in value again, just as in the 1980’s, and that the dollar’s fall wouldn’t really matter that much. And honestly, I don’t know how to answer either question.

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