Should you buy gold today? It might be cheaper than you think. Sometimes the simplest analysis says the most. If we divide the total number of SDRs created (out of thin air) by the International Monetary Fund (IMF) since 1969, by the total IMF gold we get a current price of $2175 SDR/ounce. If we then use the current US conversion of 1.55 this gives us a gold price of $3371 per ounce in US dollars!
Now that might sound somewhat high but let’s look at some IMF history and see how the actual gold price has tracked SDR creation since 1969. To help us visualize things I have provided below a chart from 1969 - 2007 with various reference numbers and some related analysis to support the yearly gold price in relation to the SDRs being created by the IMF.
1. In 1969 the Supplementary Drawings Right (SDR) was invented by the IMF as a reserve asset to supplement or “some say” eventually replace gold. At that time the IMF had 3217 metric tons of gold and 1 SDR= 1 US Dollar = 1/35 an ounce of gold. In the model developed this is the basis of Base price and it was equal to the Float price in the beginning.
2. From 1970 to 1972 we had the first major creation of SDRs (money created out of thin air). There were IMF SDR allocations in 1970 (3 billion), 1971 (2.9 billion) and 1972 (3.4 billion) and the US dollar was also allowed to start depreciating against gold and the SDR. This is what the Float price is; the Base price adjusted for the changing US dollar equivalent of a SDR. The Base price and Float price now diverged. The Actual price of gold finally reached the Base price and then the Float price in around 1975. That was a orderly 3 year monetary expansion.
3. From 1975 to 1980 we had major US dollar money supply growth and consumer inflation. The market may have sensed further SDR creation and monetary expansion. There were IMF SDR allocations in 1979 (4 billion), 1980 (4 billion) and 1981 (4 billion). The SDR became priced as a basket of 16 currencies and then that changed to a basket of 5 currencies. All this may have created some uncertainties with the US dollar and further depreciation of the SDR in US dollar equivalency. Due to a great deal of monetary uncertainty the Actual price of gold trended sharply above the Float price.
4. In 1981 the model shows both the Base price and Float price adjusting higher due to the previous SDR allocations. The actual price of gold peaked by over shooting the Mania price maybe in anticipation of further SDR creation which never occurred and hence this may have contributed to the gold price bubble collapse aided in part by Paul Volcker raising US dollar interest rates.
5. From 1984 to 1997 gold fell back and consistently sold at about the Float price which seems realistic considering the lack of monetary expansion in regard to SDRs over these years and the strength in the US dollar.
6. In 1997 the IMF recommended a onetime special SDR allocation (21.5 billion). You would have thought that there might have been some upward pressure on the price of gold. However the US Congress kept putting off approval which no doubt contributed to the gold price decline and the trending toward the Book price, as the US dollar strengthened due to a strong US economy.
7. By 2001 the Actual price had bottomed out near the Book price after investors may have realized that the US Congress might never vote on that 1997 IMF recommended SDR allocation and as the US dollar soared in strength on the internet bubble economy.
8. From 2003 to 2007, we again began trending toward the Float Price and then toward the Mania price, maybe due to very low US dollar interest rates and general weakness with the US dollar after the 2001 economic crash.
9. In 2008 the global economy took another big hit and gold continued to rise in price maybe in anticipation of a major SDR allocation which this time occurred, unlike the 1981 situation!
So let’s go to the 1969 – 2010 chart as we need to adjust the scale!
10. In 2009 a major monetary event occurred with two allocations of SDRs (182.7 billion). That was when the US Congress finally approved both the 1997 special SDR allocations (21.5 billion) and the global recession combating SDR allocation (161.2 billion). In addition the IMF reduced its gold holdings by some 212 metric tons in 2009, although some 403.3 metric tons had been approved. Both the Book price and Float price jumped tremendously and the Actual price of gold is currently moving higher to adjust to that revaluation of reserves.
11. By 2012 the model anticipates that an orderly 3 year adjustment will have completed itself and that the Actual price of Gold will be between the Book Price of $2000 and the Float Price of $3000 US dollars depending on the relative strength of the US dollar.
Remember the actual price of gold has never really ever been below the Book Price 3 years after SDR allocations have occured. That means the Actual price of gold should continue its orderly climb to at least the Book Price of $2000 by 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.