Theoretical Price of Gold

The following article appeared on the web this morning. It reports that India will be paying Iran in gold for the oil that it will be purchasing

http://beforeitsnews.com/story/1665/181/NL/India_To_Pay_Gold_Instead_Of_Dollars_For_Iranian_Oil.
_Oil_And_Gold_Markets_Stunned.html

As a matter of pragmatism, I invite the reader to focus on the following quote from this article:

"The vast sums involved in these transactions are expected, furthermore, to boost the price of gold and depress the value of the dollar on world markets."

The word "vast" is relative: India and China together take about 1 million barrels a day from Iran. That is 1/83rd of the world's daily oil output and at (say) $100 a barrel, the total oil output represents around $3 trillion a year of a total world GDP of $60 trillion a year.

So, for the world to go onto a gold standard, enough gold will be needed to pay for transactions amounting to $60T/(1mm X 365 X $100) = 1,643X the amount needed to pay for Iran's oil.

Alternatively, the price of gold will have to rise by a substantial amount.

So, what is the theoretical price to which it must rise?

Let's assume an economic multiplier of 6X (i.e. that the M1 money supply turns over around six times a year. In fact, the level of M1 in the US in December 2011 was 2.2 trillion. See:

http://www.federalreserve.gov/releases/h6/current/

And, if we assume a nominal US GDP of around $15 trillion, the multiplier I have in mind is calculated at. 15/2.2 = 6.8X. Nevertheless, I have used 6X because not every market is as efficient as the US ).

In this case, the "value" of the world's gold will need to be US$10 trillion. ($60T/6)

According to Alf Field's admittedly "rubbery" estimate in his recent article, the world's total stock of gold is around 155,000 tons ( https://www.gold-eagle.com/editorials_12/field011212.html )

155,000 tons (that's ALL the world's gold) X 1,000 = 150 million kilograms X 32.15 troy ounces/kg = 4,983,250,000 troy ounces

Divide the TOTAL amount of gold (that is all the gold owned by the central banks and the investing public and in the museums and in the teeth of people and everywhere else) and you get:

$2,006 per ounce

Unfortunately, according to Alf's estimates, the amount of gold held by the world's central banks is "only" 30,000 tons. (Maybe less because no one really knows what these lying bastards have been doing, but let's run with Alf's number)

So, if we want the world to go onto a gold standard then, using the above logic, we will need the price of gold to rise to:

$10,000,000,000,000/(30,000 X 1,000 X 32.15)

= $10,386 per ounce

Of course, there's all sorts of holes in this argument but it serves to illustrate the principle, which is this:

As a matter of pragmatism, I invite you to consider how Mrs Jones is going to pay for a loaf of bread at a current price of bread of (say) $2.50?

$2.50/$10,000 = 0.025% of one ounce

That translates to something like 0.008 grams.

I looked up the weight of an average chicken feather and the number is somewhere around 3.1 grams

So, to pay for a loaf of bread Mrs Jones would need to carry in her pocket or purse an amount of gold that weighs around 0.26% of the weight of one single chicken feather.

Hey! I've got an idea! Why don't we keep the gold under lock and key in a vault somewhere and print certificates of deposit that are worth $1 each at face value? That way we can hand three of those over the counter and the shopkeeper can hand back a coin in change that is worth half of one dollar.

Well, isn't that what we had back in 1913, before the Federal Reserve System was established?

Yep!

So, why didn't that work?

Well, the guys who ran the Fed turned out to be cheats.

And you think that the next time around they won't be predisposed to cheat?

Uh? No. Human nature remains the same.

So, the real problem isn't whether or not Mrs Jones can carry around gold that weighs 0.26% of a chicken feather, or whether we have certificates of deposit backed 100% by gold. The real problem is that people in power are predisposed to cheat to accumulate more personal power.

Yeah. I guess so.

So why don't we stop wasting time debating whether or not we should be going onto a gold standard or a seashell standard or a cattle standard?

I propose that we start thinking about designing a system of keeping the bastards honest. For example, castration might work. Eunuchs were not only suited to guarding harems in the Middle East. In China, in days gone by, a system of government where eunuchs carried out the day-to-day affairs of state seemed to work quite well.

Well, okay, maybe we can think of a more civilised way of neutralising the cheats than by neutering them. As a matter of fact, in my novel, The Last Finesse (due to be published in a few weeks time) I lay out just such a civilised proposal. There are more subtle ways to keep the Newts of this world focused on the fact that "we the people" are the reason politicians get to be politicians, and get to keep their jobs.

Brian Bloom Author, Beyond Neanderthal and The Last Finesse

www.beyondneanderthal.com