Just for fun let's calculate the value of 1 oz of gold if it were to backstop U.S. money. First, we'll use reported U.S. gold holdings to monetize money in circulation.
- Reported U.S. gold holdings: 8,135.5 tons.
We'll accept this number, even though there has not been a truly independent audit to confirm that the U.S. Treasury holds this amount of physical gold. But we have no better number to go on.
Let's first translate 8,135.5 tons into ounces. For this we will use the common assumption that "tons" are "short tons."
- 8, 135.5 tons * (2000 lbs/ton) * (16 oz/lb) = 260.336 million oz
Now, according to the Federal Reserve website, the total amount of U.S. currency in circulation is $1.08 trillion. If we monetize this currency with U.S. gold holding, we get the following:
- 1 oz gold = $1.08 trillion / 260.336 million oz = $4,148.49 / oz
Now, let's value 1 oz of gold with respect to U.S. debt. Some analysts estimate total U.S. debt, plus liabilities, to be in the neighborhood of $200 trillion. These days, total debt is a very hard number to get a handle on. Let's be very conservative here and slice this number in half, calling U.S. debt an even $100 trillion. In this case we have:
- 1 oz gold = $100 trillion/ 260.336 million oz = $384,118.98 /oz
This is obviously a fantastic valuation. Governments may issue debt, and certainly the U.S. is no exception. If we make the assumption that the currency in circulation first must be backed on a one-to-one basis with gold holdings, and some proportion of the debt needs to be backstopped, the true answer for the value of 1 oz of gold, in terms of U.S. money, must be somewhere between $4,148 and $384,118.
Note that the U.S. Constitution allows for both gold and silver to be used to backstop money. This analysis has ignored U.S. government silver holdings primarily because:
- U.S. government silver holdings were difficult to determine.
- Worldwide silver holdings are much more abundant than gold.
- U.S. government gold holdings' value likely swamp that of silver.
Regardless of how one values U.S. government gold holdings -- either by looking at currency in circulation, or debt -- each method yields a value much higher than that currently quoted at Kitco.com ($1,670).
Gold is generally accepted the world over as the backstop for a nation's currency. This is evidenced by so many central banks buying and storing gold. Therefore, if an investor also believes this -- and if the calculations shown above for the U.S. are any indication -- gold must be undervalued. Some would say severely undervalued.
If one agrees with the arithmetic and analysis above, well, this is very bullish for gold and silver bullion, or investments in the gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) ETFs. However, if gold is so undervalued, it means gold miners' reserves have also been undervalued. Since gold miners are currently out of favor, perhaps the best way to invest in the theme of this article would be to buy a gold miner or junior miner ETF.
The Market Vectors ETF Trust (NYSEARCA:GDX) seeks to replicate as closely as possible the price and yield performance of the NYSE Arca Gold Miners Index (GDM). The Tocqueville Gold Fund (MUTF:TGLDX), a 2012 Lipper Fund Award Winner, invests at least 80% of net assets -- plus borrowings for investment purposes -- in gold and other precious metals and the securities of U.S. and foreign companies engaged in mining or processing gold.
I look forward to a lively debate in the comment section below on the method, estimates, and arithmetic used in this analysis. I am also curious as to how the Seeking Alpha community views the best way, other than bullion, to invest in gold and silver.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.