Gold fair value: $10,000 to $38,0000 or More

The fair value of a good or service is the rational and unbiased estimate of the potential market price.  Unfortunately, the current gold prices are irrational and biased.  The paper market for gold trades 100 to 200 times the amount of gold there is to back the trades, which is completely irrational, so there is no gold fair value.  It also came out recently that spot prices are determined by a handful of banks. The London spot price is set twice daily by five banks: Barclays, Deutsche Bank, HSBC, Bank of Nova Scotia and Société Générale (silver is set by the latter three). These prices are then used to determine prices worldwide.  When the world-wide price of something is set by a small elite group, motivated by their own self interests, it is not only biased, it’s criminal.

According to Dylan Grice, the price of gold (per ounce) at which the US dollar would be fully backed is $10,000. Dylan Grice doesn’t present his calculations in his publication, but it seems like he is using the monetary base in his calculations, which is simply “sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks.” So, it seems like Dylan Grice’s calculation is low.  If you have a good argument for using BASE or M1 instead of M2, please let me know in the comments.  Also, if you consider Michael Kosares’ calculation at that the true inflation-adjusted price of gold (back in 2010) was $7,500, that makes $10,000 seem even lower. Note: Michael Kosares’ figures are the gold price adjusted for inflation; his numbers have nothing to do with backing the dollar with gold.

Monetary Base, M1, M2 April 2013

If we try to back the dollar with gold using M2–which includes M1 plus savings deposits, money market deposits, etc.–to get a more complete picture of the money supply, we get a much larger fair price for gold. After all, why would you not take savings deposits into consideration when calculating the money supply?  Couldn’t savings be converted to gold under a theoretical gold standard?

Let’s do the math.  According to the Federal Reserve, the M2 money supply is about $10.5 trillion. Let’s round it down to $10 trillion for the sake of simplicity.  The US Treasury holds (in theory) 261,498,926.247 ounces of gold. Using this formula:

gold price per troy ounce * total gold reserves = value


gold price per troy ounce = value / total gold reserves

…we get

1,472.00 * 261,498,926.247 oz  = $0.385 trillion.

38,241.07 * 261,498,926.247 oz  = $10 trillion.

Gold Price Gold Reserves Value
Current  $1,472.00  261,498,926.247 oz  $0.385 trillion
Theoretical  $38,241.07  261,498,926.247  $10 trillion

So, to back the US money supply with gold, it would would probably take a gold price of around $38K per ounce.  I say “around” because I rounded M” down and I’m not sure if we should use M2 or M3, which is no longer published, to make these estimates. If we threw in Michael Kosares’ inflation adjustment into the mix, we would get an even higher price.