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Albert Sung is the author of the Katchum Macro-Economic Blog, monitoring breaking economic news from a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at... More
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  • Bretton Woods System: The Real Price Of Gold: $US 203000/ounce 0 comments
    Mar 12, 2012 4:02 PM | about stocks: PHYS, PSLV, SLV, GLD

    If we would be going back to the Bretton Woods System of 1944, Mike Maloney calculated that the gold price should be at $US 20000/ounce based on foreign central banks only. To calculate this, you divide total amounts of dollars at central banks by the total ounces of gold at the treasury.

    James Turk uses a similar Gold Money Index:

    Central Bank Foreign Exchange Reserves/Central Bank Gold Reserves = Fair Price of Gold. And his calculations indicate a price of gold of $US 11000/ounce.

    But we do not live in a world of solely central banks. If we now take into account not only central banks, but also government debt, personal household debt, corporate debt, financials, etc..., we get a very different picture.

    Let's calculate what the gold price should have been in 2008:

    Total credit: 14.4 government + government sponsored enterprise debt + 11.9 household debt + 8.8 Corporate debt + 8.5 financial debt = $US 43.6 trillion in 2008. (See chart 1)

    Total ounces of gold in US treasury (2008): 261.5 million ounces of gold.

    Total credit divided by ounces of gold at the treasury (2008) = 43.6 trillion/261.5 million = $US 167000/ounce.

    Chart 1: US Total Credit Market Debt as % of GDP

    So basically the gold price should have been $US 167000/ounce if we went back to the Bretton Woods System in 2008. Since 2008, the gold reserves at the US treasury haven't increased one bit. But today Mike Maloney calculated his version of the gold price.

    Mike Maloney calculated everything in it (all dollars convertible into gold). He came up with this number: the gold price should be at $US 203000/ounce (see second video). Which is total credit divided by the number of ounces of gold at the treasury.

    So basically we went from $US 167000/ounce to $US 203000/ounce from 2008 to 2012 respectively. That's a huge amount of money printing, while the gold at the US treasury hasn't increased one bit.

    Conclusion: there is still a boatload of upside in the gold price (NYSEARCA:GLD) (NYSEARCA:PHYS) and the silver price (NYSEARCA:SLV) (NYSEARCA:PSLV).

    Here is the interview of GBI (Gold Bullion International) on 5 March 2012:

    Disclosure: I am long GLD, PSLV, AGQ, PHYS.

    Stocks: PHYS, PSLV, SLV, GLD
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