Fundamental Potential Values for Gold
(Gold is rare. The gold market is small. Gold will go up. A lot!)
Silver Stock Report
by Jason Hommel, April 21st, 2009
Sometimes, it's helpful to review the fundamentals of money, in context with the fundamentals of gold and other precious metals markets.
The World GDP is $54 trillion.
USA GDP is $14.2 trillion
USA GDP as a percentage of World GDP is 14.2 / 54 = 26%. The US economy is 26% of the world economy.
What if the GDP of the world ran entirely on the world production of precious metals, and what would the price of the metals be?
World production of silver is 600 million oz./year.
Or, another identical question, what if the GDP of the USA ran entirely on precious metals?
What if the USA needed 26% of each of those to run its $14.2 trillion economy per year?
26% of world production of the precious metals is:
Well, let's scratch that. What if the USA needed 26% of the world's precious metals to pay its relatively much smaller $800 billion annual trade deficit?
Let's start by assuming a value ratio of 10:1 for silver to gold, as that will help the payments, and of course, the value of silver would go up as monetary demand returns. Let's also assume platinum and palladium are valued at twice the value of an ounce of gold, as they are more rare, and monetization will increase demand, and hence, value.
Total gold equivalent oz. of 26% of the world's annual production of
$800 billion trade deficit ($800,000 million) / 44.2 million oz. of gold = $18,099/oz.
See, gold would have to be worth $18,099 per oz. for the USA to pay the trade deficit with precious metals, and silver would have to be worth $1,809/oz.!
And there would be zero precious metals left over to run the domestic economy, so that's an understatement of a price prediction.
So, if we go back to the domestic GDP, if it ran on all 4 precious metals that would be, um, $14,000,000 million / 44.2 million oz. = $316,742/oz.
Yeah, gold will never go that high. Right? Of course not. A 100 bill is used many times during the year, as money circulates again and again.
So, what if the Annual Budget of the USA used 26% of annual precious metals production?
Currently, the annual budget of the United States is about $3 trillion.
$3 trillion ($3,000,000 million) / 44.2 million = $67,873/oz.
Ah yes, $67,873/oz. is a much more realistic and more conservative figure for a potential gold price.
That's also very close to another figure, M3 money in the banks, divided by US gold.
$14 trillion M3 / 261 million oz. of US gold = $53,639/oz. That measures two comparable piles of static wealth, two forms of savings in the US, one fraudulent (dollars), and one real (gold).
In sum, we have several ideas on where gold will go:
If the Trade Deficit were paid by 26% of the world's mined precious metals, which is clearly an undersatement: $18,099/oz.
If the US Gross Domestic Product were equal to 26% of the world's mined precious metals, an overstatement: $316,742/oz.
If the Annual Budget of the USA were equal to 26% of the world's mined precious metals: $67,873/oz.
If M3, money in US Banks, were equal to the official US gold held in Ft. Knox, etc.: $53,639/oz.
The last two figures are much more realistic, and surprisingly close to