Written by Chris Marcus for the Miles Franklin blog.
Noted economic analyst and author Jim Rickards has spoken often about how he calculates that to back the paper currencies with gold, the price would have to be around $9,000 to $10,000 per ounce. And while there is a lot of validity to his argument and approach (which I do recommend taking a look at), a case could be made that his estimate is actually somewhat conservative.
Now full warning, before we get started today, I’m not suggesting that the price of gold is going to $10,000 per ounce this year or in the near future (although at the same time I can’t completely rule it out either). But what is truly fascinating is how an objective approach to determine how much gold is really worth does provide some interesting observations.
According to Rickards:
“If you back 40% of the $24 trillion of money supply with the amount of official gold, it implies a gold price around $9,000 an ounce. But I predict $10,000.
So how do I arrive at $10,000 an ounce?
That’s because I expect central banks to print a lot more money by the time this issue comes to a head. So, by the time the printing presses stop running around the world, that $9,000 number will likely be in the range of $10,000.”
A few notes here. First, it’s only appropriate to point out that in his initial calculation he is referring to the world’s money supply, and not just the dollar. So if one were to just use the supply of dollars, that number would be considerably lower.
Theoretically.
Because keep in mind that there is a report that documents how Michigan State PhD Economist Mark Skidmore has calculated $21 trillion of undocumented adjustments and losses between the Department of Defense and the Department of Housing and Urban Development. To date, the response by these agencies has simply been to remove the data from their website, while offering no explanation to Skidmore or the others that have contacted those offices.
But this raises the question, if $21 trillion has gone missing, how much money is really out there? And can we really trust the Federal Reserve numbers at this point?
Also, Rickards uses the assumption of a 40% backing, rather than a 100% backing. Which would result in a much higher number. Now whether there would be a 40% backing or a 100% backing, or whether it will ultimately be the government that still has the ability to set the price (I continue to believe that at some point the free market will be the true determiner) gets a bit into the hypothetical realm. As I don’t know of anyone who knows for certain if there is definitely a financial reset plan in place (while I believe it could well be possible, I have not seen anything that conclusively has confirmed that this is the case), or if there is some other way this situation is going to be resolved.
However either way you look at it, the price would have to be substantially higher than it is today.
What Rickards did not mention, although I feel should be factored in, is that we also really don’t know how much gold is out there. Rickards bases his thesis on the official gold supply data. Although if Fort Knox doesn’t really contain the gold, or if reports that much of the Federal Reserve gold has been leased out are accurate (which GATA has covered and documented extensively), that also makes these numbers go exponentially higher.
Of course what I most certainly do agree with Rickards about is that there is more money printing on the way. The reason this is important is that whatever answer you get based on whichever calculations and assumptions you choose to use will change if the money supply is then further increased. And given that the Federal Reserve has backed itself into the corner where it either has to sit by and watch the bubbles implode, or print an amount of money that would be considered exponential even compared to what we’ve seen in the past decade, one way or another, the evidence suggests that in the future the price of gold is going to be a great deal higher than it is now.
I recommend taking a read-through what Rickards had to say, and then decide for yourself if the current gold price makes any sense given what’s happening in the world. However if you believe that the Federal Reserve really has no exit plan, and that it will be forced to print or watch the bubbles collapse, buying gold at current levels continues to make a lot of sense.
–Chris Marcus
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