How much is gold really worth? The answer we get depends on who we ask and what their opinion is.
Everyone has an opinion about the value of something, whether the object of consideration is your house, a late grandfather’s pocket watch, or a specific stock. In that sense, gold is no different.
The price of a specific item or asset at any given time is a reflection of all those different opinions. Some are based on fundamentals, some are based on technical factors. But the combination of all the resulting opinions and expectations (some expect the price to go up, others expect it to go down or stay the same), plus all the other factors known at the time that could possibly affect the price, provide us with the clearest indication possible current value of the item in question: its market price.
If we believe that gold is money, then we will probably have a different opinion or expectation than someone who sees gold as an investment; or someone else who considers that gold has no useful value.
If we don’t believe that gold is money, then we are saying that something else is. That something else, practically speaking, is fiat, paper money issued by a government or central bank (dollars, euros, yen, etc.).
With that in mind, let’s rephrase our original question. In other words, “How much is money worth?” In the simplest terms, money is worth whatever it can be exchanged for. The value of money is in its purchasing power.
With that fundamental understood, then the logic is reasonably simple. Gold (or any other money) is worth what we can buy with it.
So what can we buy with it? And how do we know that the value of our gold/money is realistically priced?
With the current price of gold at $1240.00 per ounce, the value of gold today is what we can buy with twelve hundred and forty dollars.
But is $1,240.00 per ounce realistic today? Or rather, are there reasons why we might expect the price to go up or down to a substantial degree that influences our choice to hold money in gold versus gold? American dollars?
To answer that question, we have to do some research.
And, to dispel any arguments about whether or not gold is money (and to set aside, as far as possible, any bias), let’s go back to a time when the US dollar and gold were money and had the same value. worth.
In 1913, both gold and US dollars were legal tender and exchangeable. Either was convertible into the other at a fixed price. A one ounce (0.97 ounce) gold coin was equal to twenty US dollars and vice versa. (note: the official price of gold was $20.67 per ounce, which multiplied by 0.97 ounces of gold in a gold coin equals $20.00).
On the surface, it would seem that an ounce of gold in the last one hundred and four years has increased in ‘value’ by fifty nine hundred percent ($20.67 in 1913 vs. $1240.00 today). By extension, that would mean that today we can buy sixty times more with an ounce of gold than in 1913. It is not so.
We said earlier that the value of money is what we can buy with it, or what we can get for it, but what should be obvious now is that although the ‘price’ of gold has increased by fifty nine hundred percent, We don’t know if there was an increase in actual “value”, or possibly a decrease if gold was unable to maintain its original purchasing power.
However, we can still draw some conclusions about relative performance. The details are that gold gained fifty to nine hundred percent in value ‘relative’ to the US dollar. The corollary is that the US dollar fell by more than ninety-eight percent ‘relative’ to gold.
Now we need to know how both gold and the US dollar fared in absolute terms with respect to purchasing power.
And the results are clear. Gold has maintained its value, and even increased its purchasing power in absolute terms, over the century period under consideration. Also, the results corroborate the current market price of gold of $1240.00 per ounce.
What we don’t know is the extent to which the current price of $1,240.00 per ounce accurately reflects the effects of the policies that have led to our current situation. More specifically, exactly how much value has the US dollar lost since 1913? Is it ninety-eight percent, or less; ninety-nine, or more?
The current market price for gold of $1,240.00 per ounce indicates a fairly specific loss of ninety-eight and 1/4 percent. A ninety-eight percent decline in the value of the US dollar translates to a gold price of approximately $1,000.00 per ounce. And if the decline is closer to ninety-nine percent, then the price of gold should be closer to $2,000.00 per ounce.
In August 2011, gold was trading at around $1,900.00 per ounce. That would indicate a decline in the value of the US dollar of more than ninety-nine percent since 1913.
But nearly four and a half years later, in January 2016, gold was trading as low as $1,040.00 per ounce. That price indicates a decline in the value of the US dollar closer to ninety-eight percent. In fact, it is almost exactly equivalent to that brand. A ninety-eight percent decline in the value of the US dollar is equivalent to a fifty-fold increase in the price of gold since 1913 (100 percent minus 98 percent = 2 percent; 100 percent divided by 2 percent = 50; $20.67 per ounce times 50 = $1033.50 per ounce).
Between 1999 and 2011, the price of gold increased from $275.00 per ounce to $1,900.00 per ounce. And during that same period, the value of the US dollar decreased by a proportional amount.
Between August 2011 and January 2016, the US dollar had a clearly defined upward trend. And that bullish trend was reflected in a similar percentage decline in gold.
From January 2016, both gold and the US dollar reversed direction for about six to nine months and then generally stabilized at levels close to current levels.
RECOMMENDATIONS:
Gold, in US dollars, is worth between $1,000.00 and $2,000.00 per ounce. Also, and to be more specific, the current price of $1,240.00 per ounce is a reasonably accurate reflection of the current value of gold.
Any consequential move in excess of $1100.00 per ounce on the downside and $1300.00 per ounce on the upside WILL BE accompanied by similar inverse changes in the value of the US dollar.
The US dollar is the only barometer to watch. The elements of surprise and timing are critical. More especially, if you are short-term oriented in your thinking.
Items to consider that could have a material impact on the US dollar include 1) new and unexpected actions by the Fed 2) a clearer picture of the enormity of the Fed’s balance sheet 3) accelerated and delayed effects of inflation previously created by the Federal Reserve 4) a credit implosion 5) the Fed’s reaction to a credit implosion.
Some of the items listed, or variations of them, can also positively affect the value of the US dollar. This is why you should watch the dollar and not the specific event.