Close X Cookies are necessary for the proper functioning of 24hGold.com. By continuing your navigation on our website, you are accepting the use of cookies.
To learn more about cookies ...
EnglishFrench
Gold & Silver Prices in

Ratio of US Gold Reserves to Various Money Supply Metrics

IMG Auteur
Published : December 07th, 2009
965 words - Reading time : 2 - 3 minutes
( 0 vote, 0/5 )
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
0
comment
Our Newsletter...

 

 

 

 

The official gold reserves in the United States steadily increased during the first half of the 20th century. Accumulation was particularly rapid following the Gold Reserve Act of 1934 which officially raised the price of gold from US$20.67 to US$35 per troy ounce. Large shipments of gold bullion went west across the Atlantic as the European central banks sold off their gold reserves for American currency. This flow of gold reversed its course beginning in the late '50s until the gold window was closed on August 15th 1971. From that date onward, aside from some sales in 1975 and 1978, the U.S. official gold reserve has remained steady.






A recent report from Société Générale shows a chart comparing the value of the U.S. gold reserve against the U.S. monetary base from 1968 to 2008. The chart reveals a compelling argument that gold is presently undervalued. As of December 2nd 2009, the U.S. gold reserves of 8,133.5 metric tonnes are valued at US$316.4 billion, against a monetary base of US$2,081 billion.


The monetary base includes both cash in circulation and that held in bank reserves. The following chart shows data going back to 1918.





Two peak periods can be observed in the above chart when the value of the gold reserves exceeded that of the U.S. monetary base. The first peak was a result of the gold hoard accumulated by the United States resulting from the Gold Reserve Act of 1934. By the end of 1948, the U.S. held 21.7 thousand tonnes - an astonishing 75% of all the gold held by central banks!


The second peak in the ratio of values in gold reserves to monetary base was caused from the price escalation of bullion during the late 1970s. On January 21st 1980 the peak price of gold hit a high of $850 per troy ounce - a record that would stand until January 2nd 2008, nearly 28 years later.1


Gold has been in a ten year bull market beginning at a low of $251.70 per ounce in August of 1999 to over $1200 an ounce in December 2009. What is of great interest is that this near five-fold increase in the price of gold has failed to significantly change the ratio of values between the U.S. monetary base and the gold reserves!


The reason is that the U.S. monetary base has exploded as part of the extraordinary monetary policies adopted by the Federal Reserve in response to the global financial crisis beginning on December 12th 2007 with the announcement of a temporary Term Auction facility (TAF).2






As of November 2009, the ratio of the U.S. monetary base to the valuation of the gold reserve is nearly 7 to 1.


The monetary base is now greater than that measured by M1 as the value of bank reserves has now exceeded that held by the public's checking accounts and other demand deposits. The following chart shows a comparison of the valuation of the gold reserves against M1.






Historical data for both the pricing of gold and the amount held as reserves can be found going back further than 1929, but unfortunately not for M1. Again we see the two peaks as before. However, at no time did the value of the gold held in reserves equal M1. The current ratio of M1 to gold reserve is 5.7 to 1.


It would never happen, but it is interesting to consider that if everyone cashed in their checking accounts and went to purchase gold directly from the U.S. reserve at the current market rate, all of the gold would be gone after only 17.5% of the cash was redeemed.


If the citizens decided to also cash in their savings accounts, then that figure drops to 3.5%! In other words, the ratio of cash in circulation plus the value of all publically held checking/savings accounts to the official gold reserve is 28.5 to 1.


Though it would be unwise to simply project these ratios onto the current price of gold in order to determine what the price ought to be, they do suggest that gold is indeed undervalued.


At only two times in recent history was gold significantly over-valued in terms of the U.S. dollar. In both of these instances there was a clear result. In 1934 the new price of US$35 offered by the U.S. monetary authorities resulted in a multi-year inflow of gold to the United States from the rest of the world. The second time was the final run-up at the end of the 1970s culminating in the famous US$850 per troy ounce price that was followed with a near two-decade bear market.


The mild gold fever at present time does not compare to the long lineups of gold buyers seen in 1980. On the contrary, there is still a large level of public disinterest in accumulating gold in preference to U.S. dollars. As the 30-second Cash4Gold ad during Super Bowl XLIII revealed, the largest advertising campaigns are still aimed at getting people to sell their gold, not buy it.



Notes

1 The average price of gold in 1980 was just under US$615 per troy ounce.

2 The TAF is still with in existence nearly two years later - its most recent action being a US$25 billion auction of 42-day credit on November 30th 2009 for which $16.7 billion was sold.



 

Mike Hewitt

Editor

DollarDaze.org

 

Also by Mike Hewitt

 

 

Mike Hewitt is the editor of www.DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies.

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

© 2007 DollarDaze

 


 

 

 

 

 

Companies Mentionned : Gold |
<< Previous article
Rate :Average :0 (0 vote)
>> Next article
Mike Hewitt is the editor of www.DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies.
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
A Salvo in the Battle for the Go...
04:41overtheedge
I would argue that the devil is in the details, i.e. the definition of money. What the people of the US are using is currency. Currency bei...
A Salvo in the Battle for the Go...
01:03Malcolm B.
Keith, Simple answer is to buy and hold gold in the UK.... Attracts no vat or capital gains on sale, (although I guess there may be issues...
A Salvo in the Battle for the Go...
26 FebFrankinca1
Sort of written for a PHD in economics, which gold believers (myself) are not often that well educated, have difficulty following. The definition o...
A Salvo in the Battle for the Go...
26 Feb07788525833
The dollar has a monopoly over all other types of money which is rammed down peoples throats by gun and drones , any one wanting to change this...
In Search of the Magic Wand: Car...
25 FebDoom
Yes, stay away from University of Phoenix, a school with a 9% graduation rate, that only gets students because it spends $200,000 a day on Google a...
Emails From Kiev: Free Speech Va...
25 Febovertheedge
"The problem is, the asshats associated with Poroshenko are even worse than he is." I'm assuming you mean the predators in the US White Ho...
The Bull Case For Gold This Year...
25 Febdepourcq
You talked about all the wrong reasons that gold will rise or fall, their is only one that everyone should know. The US has a debt of 18.134 trilli...
The Bull Case For Gold This Year...
25 Febneville
The fact that you are very lowly rated might be one of two things .1.You have been playing this card to often (Bear Joker) 2,The other is that you ...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS
Mining Company News
Caledonia Mining(Cu-Ni-Co)CAL.TO
Update on Implementation of the Revised Investment Plan
CA$ 0.72+0.00%Trend Power :
Corporate news
Avanti Mining(Ag-Le)AVT.V
Alloycorp Mining to Exhibit at Prospectors and Developers Association Conference March 1 to 4
CA$ 0.06+0.00%Trend Power :
Corporate news
Endeavour Financial(Ag-Au-Co)EDV.TO
Mining Generates Record Operating Cash Flow in 2014
CA$ 0.58+3.57%Trend Power :
Financials
Silver Spruce Res.(Ag-Au-Cu)SSE.V
Reports Management Changes
CA$ 0.02+0.00%Trend Power :
Corporate news
Northern Gold(Au-Zn)NGM.V
Announces Updated Bulk Sample Results-Recovers 1,797 Oz Gold at 94.9% Recovery
CA$ 0.03+100.00%Trend Power :
Corporate news
Forum Uranium(Coal-Ngas-Ur)FDC.V
Commences Drilling on Its 100% Owned Fir Island Project
CA$ 0.08-5.56%Trend Power :
Corporate news
Anaconda Min.(Au)ANX.TO
maximizing Pine Cove deposit potential through recent drilling
CA$ 0.06+22.22%Trend Power :
Corporate news
Sprott Resources(Ag-Au-Co)SCP.TO
Resource Corp. Announces Date for 2014 Annual Results Conference Call
CA$ 1.33+0.00%Trend Power :
Corporate news
Nevada Copper(Cu)NCU.TO
Achieves Major Milestone
CA$ 1.69+6.96%Trend Power :
Corporate news
Vena Res.(Ag-Au-Cu)VEM.TO
Intersects 24.2 Metres of 131 g/t Ag and 0.4 g/t Au Including 8.1 Metres of 292 g/t Ag and 0.
CA$ 0.07+0.00%Trend Power :
Corporate news
Comments closed
Subscribe to 24hGold’s daily market briefing
  • Prices and data of precious metals in 119 currencies and world mining companies
  • Daily analysis of the economy, markets and more
  • Free, daily and indispensable
Stay informed, subscribe now !
* Your email will never be shared.