The Shadow Gold Price
Nothing can explain the fair price of gold better than the Shadow Gold Price, because it “disinfects” the price of gold from any price manipulation. But what in the world does Shadow Gold Price mean?
The Shadow Gold Price indicates the fair value or in other terms unmanipulated “price” of gold.
Here are the 7 definitions of the SGP – Shadow Gold Price:
To identify the intrinsic value of the dollar today, we examine the corollary – the intrinsic value of gold in dollar terms, which we dub “The Shadow Gold Price” (SGP). To do so we assume that Federal Reserve Bank liabilities are again exchangeable into gold (recall, FRB reserves are bank assets – the stuff that used to have to be gold). One would simply divide the dollar amount of current Fed liabilities by official gold holdings. This calculation, while simple, is intellectually honest and produces a breathtakingly large “equilibrium” gold price of approximately $9,500 per ounce today ($2.5 trillion divided by US official gold holdings of 8100+ metric tons).
M1 Money Supply vs. U.S. Gold Reserves: The U.S. M1 money supply consists of currency and bank deposits. As of 9/29/2011, the U.S. government currently holds approximately 260 million ounces of gold. If the government were to back each dollar in circulation with gold as numerous governments are now considering around the world, the result would be a shadow gold price of $8,102 per ounce (M1 $2.1 trillion / 260 million ounces). This represents potential symptoms of ongoing inflation and corresponding near-future gold price increases.
Comparing Gold Bull Markets: Many gold experts agree that gold is currently in a bull market. However, to put the current bull market into perspective, in the 1970s gold prices rose from $35 to $850 per ounce, which was an increase of approximately 24 times. The low price of the current gold bull market in 2001 was $255.95. It is useful to compare magnitude increases between similar market phenomena to determine the potential phase of development a trend may be in within a given economic cycle. In this case, if we multiply today’s gold price of $1,620 (as of 9/29/2011) by the same factor (24), the current gold price would be $38,880 per ounce. This may seem high, but the inflationary environment of the 1970s triggered a flight to the safety of gold that has a high probability of occurring again.
Global Money Supply vs. Global Gold Reserves: As currency devaluation continues in many of the developed economies due to irresponsible fiscal and monetary policies, global governments may be forced to back their currencies with gold either wholly or fractionally. Assuming governments pay market prices to acquire their gold, and given total reported global M1 money supply of approximately $19.2 trillion, and given total reported gold reserves by all global financial institutions of approximately 930 million ounces, the resultant gold price today would be $20,645 per ounce.
The Dow/Gold Ratio: The Dow Jones Industrial Average converted into ounces of gold is commonly called the “Dow/Gold Ratio”. This ratio was at “1” when gold peaked in 1980, which indicated that the index value of the Dow and the price of an ounce of gold in 1980 were the same price. To bring the Dow/Gold Ratio back into balance today based on the Dow’s level of 11,153 as of 9/29/2011, the price of gold would need to be $11,153 per ounce. This imbalance between the Dow and the price of gold suggests that the stock market is over-inflated and a significant downward correction is likely in the near future.
U.S. Trade Deficit vs. U.S. Gold Reserves: If the U.S. trade deficit is not reversed, the U.S. will eventually become insolvent because no individual or nation can survive by perpetually spending more than their income. However, if the U.S. trade deficit is reversed, dollars will flow back into the U.S. and contribute to domestic price inflation as the money supply expands. Based on the 2011 cumulative trade deficit of approximately $10 trillion (up from $6 trillion in 2007), and given U.S. gold reserves of approximately 260 million ounces, if the $10 trillion of foreign-held dollars were to be rapidly unloaded into circulation within the United States, the price of gold today could increase to as much as $38,462 per ounce.
U.S. Government Debt vs. U.S. Gold Reserves: According to the Government Accountability Office (GAO), as of June of 2011 the U.S. Government’s balance sheet is overwhelmed with approximately $61.6 trillion in future liabilities for Medicare and social security. If the dollars required to pay for those entitlement programs were soundly backed by gold, and given U.S. gold reserves of approximately 260 million ounces, the price of gold would need to be $236,923 per ounce.
Can We Predict the Day of the USD / GBP and EUR Collapse and the Price of Gold?
First of all the question contains a mistake within itself. The mistake is the presumption that real intrinsic money could rise or fall, although its purchasing power remains constant. It is the presumption that an inflated, debasing currency could be used as benchmark to measure the ROI on gold and silver.
One ounce of gold is one ounce of gold, period. Regardless what governments decide or print on their legal tender promissory notes.
But back to the question. Before FIAT currencies return to their intrinsic value which is zero, Gold will of course “rise” on its way in terms of Dollars, Euros or whatever FIAT currency you use until the reset of the monetary system will appear. That is when you will not be able to buy anything any more with FIAT currencies. Neither will you be able to buy gold and/or silver any more(!)
Therefore it is imperative that you put yourself on Gold-Standard now. Many countries around the world are increasing their gold reserves massively. What is good for a government / country cannot be bad for the individual.
And it is not too late to get into the markets before the shadow gold price will become reality in terms of current spot price. Enjoy and profit from your precious metals!