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Gold’s Value Based on Money Supply

Courtesy of Bruce Pile and Dollar Daze, is this chart, which shows the backing of the monetary base in terms of the Gold held by the US. Note that 100% would mean that the money supply is 100% backed by the price of gold (at that time). The two bull markets in Gold peaked at well over 100%. Anything above 100% would clearly be speculative.

Chris Puplava at FinancialSense.com wrote this last year:

What has been a constant theme this decade is that the supply of gold has dramatically trailed the growth in fiat currencies all over the world. This was not the case by the end of the secular bull market in gold in the 1970s and early 1980s run in which the USD was more than 100% backed by gold as the price of gold (and thus the value of USD gold reserves) increased well above the rate of the US monetary base. For a 100% backing of the USD by gold, the price of gold would have to rise to $6,888 an ounce! Looking at the percent backing of the USD by gold reserves helps to indicate which is a greater value, the value of the greenback or the value of gold. As shown below, the percent of USD currency backed by gold is currently below even the low point of the 1970s secular bull market starting point, this even with gold now in triple-digit territory and at an all-time high near $1,200 per ounce! Using the same type of analysis on a global perspective, all of the international reserves of the world are only backed by gold in the low double-digits, requiring a gold price of $7,321 per ounce for 100% backing.

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Chris’ work shows that for a 100% gold-backed US Dollar, the gold price would need to be $6,888/oz. For the entire world to be on a gold standard would require a gold price of $7,321.

The question is what does this all mean going forward?

This is one of many things we’ll be discussing in our upcoming CME-sponsored Gold/Silver Webinar. You can signup by clicking here or the ad below.



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  • http://www.jasonburack.com Jason

    Jordan,
    Nice work again as usual, my friend. Casey Research ran a similar piece awhile back with some graphs. Gold is only around a nominal all time high. For it to be at an all time inflation adjusted high in real terms, that equites to above $2300/oz in today’s dollars relative to 1980s dollar. I have heard estimates from others saying $2600/oz inflation adjusted that are credible in 1980s dollars. That would be the camp I am in. I think gold should be around there right now. I have heard John Williams of ShadowStats say and write gold needs to be over $7000/oz to be inflation adjusted…

    China has switched its gold buying strategy significantly. They are going to do dozens of small deals with US and Canadian gold miners to buy gold instead of one or two large purchased on COMEX or the LBMA. These smaller, under the radar deals will prevent technical traders who do not follow tiny mid cap, small cap and micro cap companies from jumping on board and riding the price much higher too quickly for China’s liking. The CDE deal china did in the last few weeks will be the first of many in my humble opinion, as China has precedent for doing these deals for yrs in China with their own gold miners. China is basically giving these miners low interest loans as these miners get cash a lot further ahead of time than normal and get loans where banks might not have given them one…

  • http://www.thedailygold.com Jordan Roy-Byrne, CMT

    Jason, I agree about China. One has to consider that in terms of “ability to create a gold currency or back a currency with gold” China is way behind the US and Europe, who own lots of gold. China owns too much paper. They will be buying for a long time.