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


As I reported yesterday, the study of economic fundamentals is a lost art, a lost science, something that nobody has paid attention to in the financial world for nearly 30 years, except a few "crackpot" independent thinkers like me, who have been making money hand over fist for the last decade as we discovered the bull market in precious metals by studying the basic fundamentals like "Most gold mines can't produce more gold for less than $300/oz." back in 1999.

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.
http://en.wikipedia.org/wiki/World_gdp

USA GDP is $14.2 trillion
http://en.wikipedia.org/wiki/Usa_economy

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.
World production of gold is 80 million oz./year.
World production of platinum is 8 million oz./year.
World production of palladium is 7 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:
156 million oz. of silver
21 million oz. of gold
2 million oz. of platinum
1.8 million oz. of palladium

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.

Converting: 
156 million oz. of silver = 15.6 million oz. of gold
2 million oz. of platinum = 4 million oz. of gold
1.8 million oz. of palladium = 3.6 million oz. of gold
21 million oz. of gold = 21 million oz. of gold

Total gold equivalent oz. of 26% of the world's annual production of precious metals
 = 44.2 million oz. of gold

$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 each other.



Sincerely,

    Jason Hommel