Wednesday, January 1, 2014

A Sobering Calculation on the Dollar / Gold Price Ratio


 Re: Jim Rickards predicts the price of gold

In this four minute interview Jim Rickards predicts that the price of gold will go to "$7,000 or $9,000 or even higher".  (The price becomes infinite if all confidence is lost in the dollar.)

How does Jim make this prediction?  Well, consider these facts:

M1 = $2.611 trillion (cash and bank checking accounts)
M2 = $10.934 trillion (M1 plus bank savings accounts and short term certificates of deposit)
Gold owned by the Fed: 261.5 million ounces

Therefore, the price at which the Fed would have to price gold in order to honor all of M1 without running out of gold is determined by the following calculation:  M1 / ounces of gold

$2.611 trillion (M1) / 261.5 million (gold ounces) = $9,985 per ounce

Here's the calculation using M2:

$10.934 trillion (M2( / 261.5 million (gold ounces) = $41,813 per ounce

Remember...until the US abandoned the Bretton Woods Agreement in 1971, the dollar was pegged to gold at $35 per ounce! 

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