Owing More Than Half Of The World's Gold

Gold has bottomed in terms of just about everything like oil (in 2005), platinum (2008) and the Dow (1999). One important measure in terms of which it has not bottomed is the amount of currency (US adjusted monetary base).

This monetary base, as the name suggests, is at the root of debt or money creation in this debt-based monetary system. If this system was honest, then this monetary base would basically reflect gold available at the Treasury or Federal Reserve to redeem currency issued by the Federal Reserve.

Yes, the Federal Reserve does not promise to pay the bearer of US currency gold anymore; however, “paying gold”  is the measure by which we will know how corrupt and leveraged the system is. 

According to the Federal Reserve Bank the adjusted monetary base on 5 August 2015 was $4.019 trillion. With gold at $1 090 that is roughly 3.69 billion troy ounces or 114 771 tonnes of gold that is owed. In comparison, during March 2008 when gold peaked at $1 000 per ounce, it would have been 0.857 billion troy ounces of gold (26 656 tonnes) that was owed.

In their May 2015 report, The US Treasury claims to have 0.262 billion troy ounces or 8 149 tonnes of gold. That is a massive shortage of roughly 3.428 billion troy ounces or 106 622 tonnes of gold, if all the debt represented by the monetary base is settled in gold.

According to some estimates total world gold reserves could be roughly between 155 244 (4.991 billion oz) to 171 300 (5.51 billion oz) tonnes (estimates by James Turk and GFMS respectively). So, the US Treasury should have about 67% to 74% of all the world's gold in order to settle most of its obligations.

Also, 22 000 tonnes is the most gold reserves the US has held at any point in time. Even this is nowhere close to 114 771 tonnes owed. It is scary to think that a debt of about half of all the estimated world gold reserves has been amassed in 7 years. (from owing 0.857 billion ounces in 2008 to owing 3.69 billion ounces in 2015).

It is clear that the system is way over-leveraged and obligations will never be settled. This over-leveraged system will at some point de-leverage as it has done before. To gain more insight regarding this let us look at the chart below:

chart generated at http://www.macrotrends.net

Above, is a chart that shows the ratio of the gold price to the St. Louis Adjusted Monetary Base back to 1918.  That is the gold price in US dollars divided by the St. Louis Adjusted Monetary Base in billions of US dollars. So, for example, currently the ratio is at 0.27 [$1 090 (current gold price)/ $4 019 (which represents 4 019 billions of US dollars)].

On the chart, I have indicated the three yellow points where the Dow/Gold ratio peaked: point 1, 2 and 3. After the peak in the Dow/Gold ratio, the Gold/Monetary Base chart made a bottom at the red points 4 and 5 respectively. It is at these points that the monetary base could not expand relatively faster than the gold price increased.

Point 4 (about Oct 1932) on the chart, represents an approximate point where the constraint or limitation due to the fixed gold price at $20 and ounce was being adversely felt by the US due to,  the need to increase the money supply. As the ratio started to increase from this point due to people redeeming their gold (stopped to an extent by gold confiscation order); they were eventually forced to revalue gold to $35 an ounce in 1934. In reality, this actually represented a downward revaluation of the US dollar of 42.9%, which also indirectly increased the money supply.

Point 5 (about January 1971) on the chart, represents a time when the US was losing a significant amount of gold due to the nations demanding redemption of their US dollars for gold. Due to being unable to cover all the foreign holdings of US dollars with the related amount of gold, the US suspended (really ended) the convertibility of the US dollar into gold, on 13 August 1971. Not only was this a debt-default, but also a downward revaluation of the US dollar. This is because now those nations holding US dollars had to go to the open market to get gold. Instead of getting their gold at $35 and ounce, they had to pay $43.40 on 13 August 1971, and much higher prices as gold increased significantly over that decade. Now the US could increase the monetary base without any gold obligations to nations as a restriction.

From the above, it is clear that we had two similar patterns playing out in the early 30s and 70s. We had a major peak  in the Dow/Gold ratio followed by a huge demand for gold, and an eventual revaluation of the US dollar.

The current situation, from 1999 to today, is shaping up in a very similar way. Point 3 (about August 1999) is when the Dow/Gold ratio made a significant peak. From that time to now, the chart has actually performed in a similar manner to the early 30s and 70s, except for the pattern being much bigger. Now, there is likely to be an incredibly huge demand for gold, which will go together with a  great deflation. This is very similar to the redemption of US dollars for gold in the 30s and 70s scenarios above.

This demand for gold will eventually cause point 6 to be in, with the ratio reversing violently upwards. It is very likely that at some point the US will be forced to revalue the US dollar in order to counter the deflation. The gold price will go to incredible highs during this phase. Based on this chart and the current monetary base, it could go to at least 5 times the monetary base, which is gold at $20 000.

********

For more of this kind of analysis on silver and gold subscribe to my premium service.