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Gold At $5,000 Per Ounce?

5 September 2009 894 views One CommentEmail This Post Email This Post


What if the US government were to revert back to the gold standard? At what price of gold would we peg the dollar?

In 1971, the US government had 280 million ounces of gold [source]. Assuming that the sale of gold by the US mint is inconsequential, and that the amount of gold today is the same. How many dollars are there currently in circulation? According the the US Federal Reserve the M1 numbers are currently around $1.654 trillion. (M1 is the number of dollars held by the public as cash plus the amount held in checking accounts). Divide this by the amount of gold the government allegedly possess (280 million ounces) and we get $5,907 dollar per ounce!

Instead of the M1 numbers, if we consider the M2 numbers, we assume $8.3 trillion and arrive at $29,642 per ounce of gold! According the St. Louis Federal Reserve:

M2 is a measure of the U.S. money supply that includes M1 (currency and coins held by the non-bank public; checkable deposits, and travelers’ checks) plus savings deposits, small time deposits under $100,000, and balances in retail money market mutual funds.

As of writing, the price of gold is $996/oz. For an accurate estimate, be sure to check out our gold price and silver price pages.

So why is this calculation important? Consider what’s been happening in the past few years. The US Government has greatly increased its debt and future monetary obligations through waging wars and a trillion-dollar bail-out package. Trillions of Dollars worth of the debt is held by foreigners. The Government can get away with this because the US Dollar enjoys a reserve currency position, which means the Government can just print more money to pay its debtors. However, at some point, our foreign debtors will lose faith in the Dollar causing a major flight to safety, which entails our debtors dumping the Dollar and moving in to other currencies and/or hard assets. Hard assets are precious metals like gold, silver, platinum, storable commodities like oil and of course, real estate.

Historically, silver has traded for about 1/16th or 1/17th the value of gold (excluding the past 2 decades). This probably because silver is about 16 times more abundant than gold in nature.  In a free market economy, silver would trade for 1/16th the price of gold today. However, we don’t live in a free market society.

Almost all of the gold EVER mined is still above the ground and is held in the form of bullion. However, most of the silver mined each year is consumed in various industrial and manufacturing processes. The worldwide supplies or invesntory of silver are estimated at 300 million ounces. Compare this against the 1.6 Billion ounces for gold and you’ll see that silver seems somewhat of a rarer commodity!

If silver were to revert to its historical mean vs gold, it would be trading for nearly $60/ounce. Today the value of one silver ounce is $16.30 which means its price would increase nearly 4 times from here! Make sure you buy silver bullion while its under $50/ounce. By the time it hits $50, you will be dragged in to the frenzied madness and you’ll end up paying a much higher price.

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One Comment »

  • Jarod said:

    Wow, the US of A is going to a place it has never been in history. You have some nice posts here at your blog/website. I´ll be back to check it out later. I also guess you are doing some IM. Good work!

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