Wednesday, January 25, 2017

Gold price should be well over $20,000 per ounce today if held to historical relation of gold to global GDP

Analysts have looked at several different measures as to why the current gold price is only around $1200 per ounce, especially as global money supplies have skyrocketed since the 1980's.  And even here at The Daily Economist we have published numerous articles pointing out the willful manipulation of gold by governments, central banks, and the markets that act as the platform for this manipulation.

But looking at gold from both a fundamental and technical perspective, its significance in supporting economic growth through the backstopping of currencies cannot be denied... and why the move in 1971 by President Richard Nixon to remove that gold backstop from the dollar reserve currency was a mistake that was paralleled by the previous controller of the global reserve (Britain) back in the 1931.


Graphic courtesy of SRS Rocco Report

The most powerful banker in the early part of the 20th century stated that "Gold is money, everything else is credit."  And it is this difference that determines whether economic growth is real, or simply an artificial creation that lasts until the fuel of debt (credit) runs out.

When stock markets crashed at the end of the 1920's, their boom had been fueled by cheap money, and borrowing on margin.  And it is interesting to note that these same markets did not return to their 1929 all-time highs until the 1950's, which was about 6-7 years after the world returned to a proxy form of a gold standard following the conference at Bretton Woods.  And the markets then went on to steadily rise until the late 1960's, when the U.S. decided to artificially expand the money supply to fund the war in Vietnam.

So why are these relations important?  Because there is still one relation we have not mentioned here that involves gold when it was historically part of the world's money system.  And that relation is Gold Supply/Value to GDP.

As we can see, the value of world monetary gold stocks of $11 billion was a third (33%) of the $32 billion of global GDP.  So, for each dollar of monetary gold, the world economies produced three times the GDP. 
Now, let’s look at the situation today.  According to the World Bank, global GDP fell to $73,892 billion ($73.9 trillion) in 2015.  As I mentioned in a previous article, this was down 5.7% from $78.4 trillion in 2014:
What a difference in 86 years… aye?  Today, the value of world monetary gold stocks is only 1.7% ($1.28 trillion) compared to global GDP of $73.9 trillion.  I calculated the value of present monetary gold stocks by multiplying the current 33,250 metric tons of official gold holdings by $1,200 an ounce.  Of course, we don’t know the TRUE official gold holdings figure, but this at least provides us a guideline. - SRS Rocco Report
In 1929 the dollar price of gold was $20.42, and the total value of above ground gold was approximately $11 billion.  This meant that the gold supply supported global GDP at a rate of 3:1.

However 86 years later, with the gold price being approximately $1200 and where there is a much greater supply of the metal having been mined and owned by governments and central banks, the ratio of GDP to the gold value is now a whopping 57.59 (close to 60) :1... or nearly 20 times what it was in 1931 when gold was removed from the reserve currency by the British.

Thus taking this historic relation to today, it would mean the price of gold to support a $73 trillion global GDP should be nearly 20 times what it is, or at least $20,000 per ounce.

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