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Valuing Gold
Submitted by Alidair Macleod via GoldMoney.com,
There is only one way to value gold, and that is to quantify the expansion of the fiat currency in which it is priced.
That is the sole purpose of the Fiat Money Quantity (FMQ), which since I last wrote about it five months ago has increased by $375bn to $13.7 trillion. This is despite the end of quantitative easing, which had been tapered down before being abandoned altogether. The long-term chart of FMQ is shown below.
FMQ is the total instant-access cash and deposits in the commercial banks plus their reserves at the Fed and the temporary means by which those reserves are changed. Its purpose is to quantify the difference between sound money and fiat currency by including the steps by which gold has been progressively absorbed into the banking system from private ownership and into government vaults via the commercial banks and the Fed. A fuller description can be found here.
The pace of FMQ creation from 2008 continues well above the pre-Lehman crisis trend, and it is now $8,259bn higher than at that time, an increase of 152% in 78 months. Who would have thought that a temporary provision of money and credit to stabilise the financial system in the wake of the Lehman crisis would have developed such permanency?
As a measure of monetary inflation, FMQ differs from more conventional metrics by including liquid bank assets held on the Fed's balance sheet. By including money parked out of sight in this way a truer position is obtained. Critics of this approach say it is double-counting, because bank reserves recorded at the Fed are also recorded at the commercial banks as customer deposits. This is undoubtedly true, but the whole fractional reserve system involves multiple counting of the same underlying money, so it is hardly disqualified on these grounds.
The next chart shows how FMQ has deflated the price of gold, measured in constant 1934 dollars. This was the year that President Roosevelt devalued the dollar from $20.67 to $35 per ounce of gold.
The gold price is shown in nominal US dollars and also in constant 1934 dollars adjusted for the increase in FMQ; the disparity between these two prices has widened over the years to $1,211 and $3.91 respectively. The two previous times the adjusted gold price hit these low levels were in April 1971 at $3.31, four months before President Nixon was forced to suspend the Bretton Woods Agreement, and in October 2001 at the start of the last bull market when it got down to $3.45. This time, the higher rate of increase in FMQ suggests the price today is more undervalued than the two previous times on a forward-looking basis.
The last chart is of the gold price since the Lehman crisis and in July 2008 constant dollars, when FMQ accelerated above the long-term trend as shown in the first chart.
While the nominal price taken in February 2015 was $1211, the adjusted price was $480, representing a 45% fall from the $918 price in July 2008.
In summary, FMQ shows that gold is substantially under-priced in dollars on a long-term value basis. In the past this level of under-pricing has been followed by major price shocks to the upside on both occasions.
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We are not measuring the "value" of gold at all! Therein lies the beauty of trading gold. You do not have to divulge how/why you value it. You state your terms of trade in weight and purity.
There can be an agreement on what is solid gold and what is tainted.
People who need trade, will likely need gold more than people who do not need trade. It is that simple.
The value of gold is what somebody would exchange you for it (chickens, real estate, FRNs).
Gold becomes money when faith is lost in fiat, and banks crash. During the other times in history they call it a 'commodity'.
Gold is 90% held for investment (money), 10% industrial commodity. Silver is 60% an industrial commodity, 40% held for investment(money).
Most of the worlds gold is hoarded and will never hit the market. These national gold reserves back the value of a nation's land, real estate and total assets. So instead of using FMQ I would go further and suggest measuring gold in cash equivalents as 'marketable' gold I.e the amount of gold that can ever be 'bought' at any point in time, as most gold is 'off the market'. This puts the value of physical gold over $50k oz
There is only one of me, therefore I am worth all the fiat money in the world. Gold is only worth what the market values it at a particular moment in time.
AU/AG pisses me off half the time but I keep on buying it as the budget allows. I just can't find anything else safe that holds value against inflation that doesn't involve paper products. Maybe when pm's hit a big up I'll buy whatever the hot new musclecar is and flatbed it home and store it for ... fuck, nevermind, I'll be dead before it becomes a valuable collectible. Should of bought a bunch of calves last year.
Sometimes it is worth less than water
other times it will get your dick sucked
OK, simple definition of money. Not really complex. Trade started with barter of commodities(3-4-5 thousand years ago). Citizen 1 has chickens that lay eggs. Citizen 2 has hogs that make bacon. Citizen 1 would like some bacon. Citizen 2 would like some eggs. Both get together and agree on how many eggs it takes to get a pound of bacon. Deal done. Only works well when both want what the other Citizen wants. Deal doesn't get done otherwise.
Too complex so far?
Citizen 1 wants some shoes but Citizen 2 doesn't make shoes. Citizen 3 makes shoes. Citizen 1 hopes to that Citizen 3 needs some eggs in exchange for some shoes. If so, deal done. Otherwise, no shoes.
Eggs, bacon, shoes. All commodities that require human effort to produce. Gold/silver are also commodities that require human effort to produce.
Too complex so far? Barter requires a perfect matching of commodities on offer and in demand.
So what does Citizen 4 have to offer. He offers some gold/silver. Commodities that require human effort to produce. And commodities that have the properties of being easily divisible, having consistent properties and being in limited quantities. Ideal for an intermediate commodity in barter called money. Something that everyone recognizes as having value and is willing to accept in return for their commodity. No more having to match supply and demand perfectly. Greatly simplified the whole process of barter.
Somehow, we have to relearn the concept of money that humans understood 5 thousand years ago. It ain't Federal Reserve Notes, it ain't Bitcoin. It is some commodity that requires substantial human effort to produce, is in limited supply and meets the basic definition of money.
The bottom line is that money is just another commodity that has consistent, divisible properties like gold and silver.
When the fiat currency system implodes, you better understand money. Your survival will depend on it.
Credit/debit systems were around more than a thousand years before gold and silver coin money.
cautionary detail for all the Goldenboys at ZH.
I have a better idea......we win.....you lose.
They pull the confiscation card and disqualify themselves, becoming the laughing stock of the world. Claiming to have 8.5 kilotons of gold and daring to confiscate it from shrimps? Nope, the confiscation is happening right now, as we speak. All the discouraged sellers of fizz at these prices (and buyers of paper shorts)... THAT is the confiscation IMHO. Should it get that bad, they will have way too many other problems at hand, e.g. how to pay police and military personnel? With worthless dollars, and they all just nod, serve and protect ???
So you think Washington is not yet the laughing stock of the world. G W Bush won that distinction for the US over a decade ago. Washington and her European allies are no longer concerned about whether or not they are viewed as foolish laughing stocks. They are only concerned with staying in power and the continuation of the status quo ante.
Witness the secrecy of the investigation of MH17. Could anything be more comical than that? There has been more information about the Germanwings crash in 3 weeks than in the 8 months since MH17. The secrecy of the investigation and and public search for witnesses only opens the doors for the subornation of evidence.
The confiscation of gold after the probable military takeover of our government pales in comparison to the continued culling of the Middle Eastern population and the apprehension of our subversive fellow citizens.
Hope for the best. Prepare for the worst.
Could you be any more of a pussy?
Aw. I didn't mean to step on Baby's toes?
Come here. Daddy will get you a sucker.
Today was a good day for me. I bought an 1853 type one gold one dollar coin today because I can. I needed that coin because how the fuck can anyone explain why there ever was a one dollar gold coin. What will anyone say about that? I find some coins that are undervalued. Hey asshole the UNtied States actually had a gold one dollar coin. All I want to know is how that happened.
I find coins like that because I search and I want an explanation as to why they didn't make many of them. I know why just as well as anyone else around ZH.
Very cool coin though and another ZHer has a nice example of one. They can kiss our ass.
By my calculations, Jim Sinclair and ZH have been wrong about gold every year since they've been predicting it would go up.
A doctor's bag has many medicines for a range of illnesses and injuries. No single medicine is a cure all. Gold by way of analogy is the best of the medicines in that bag when it comes to a serious illness and that is all I know and need to know.
A proportion should be set aside for gold and silver in all portfolios. The exact proportion is something each person needs to asses depending on a whole array of issues.
If, as they say, generals prepare for the last war, then economists must prepare for the last depression.
Imo, the world wide depression toward which we are slouching, is going to require a major war to outmaneuver it. (And to take everyone's mind off of the depression.)
I'm sure I'm not the only one who looks at all the police shootings of unarmed citizens in the four corners of the US, and thinks could the Dept of Homeland Security have put out a memo to every police force in the country?
Do you detect NLP "constant US dollars"?
The reasoning makes sense, but that's where it ends.
When you live in a society that considers a Ferrari a sound investment, despite horrendous depreciation, you know that old thinking doesn't apply. Unfortunately, if given a choice, people will most likely take the $500.00 in cash instead of the $1200.00 lump of metal. Times have changed.
In my opinion, we are on the verge of the greatest deflationary cycle ever and as far as I understand, gold doesn't do that well during these periods.
Gold is only worth what people are willing to pay. And until gold is once again treated as a sound investment, it will continue to be "under-piced".
Sure there is a quantitative ratio between the amount of physical gold around and the amount of global fiat (however that confusion is "measured"). I don't see how that alone can determine golds utility as money and therefore its value in relation to the goods and services it procures.
The reality right now is that the velocity of fiat in ordinary daily retail trade vastly outstrips gold, even if fiat is regarded solely as a medium of exchange and gold solely as a store of value. (Gresham's law?). In a sense both gold and fiat are serving as money but neither one is carrying both of money's fundamental functions (unless you are naive enough to store wealth in fiat) I.e. medium of exchange and store of value.
Nascent price volatility excepted, bitcoin is more money than gold is, because its retail usage velocity far outstrips gold and it at least is holding some value. Like gold, bitcoin trade value (price) can be manipulated by TPTB simply by purchasing it slowly with magic fiat and selling it suddenly. Fiat and its rulers are always king as long as babylonian money magic infects the minds of ordinary men. What will become widely accepted as money and what will its value be, I don't have any idea. I use whatever is in vogue to facilitate trade and store a modest amount of life supporting wealth in a range of personally held assets that I think will have some degree of enduring use to other humans, things like real estate, gold, art, viable small business, but definitely not fiat or any asset derived from it.
1. See what the government hates.
2. Buy it.
PMs are the ultimate hedge. Like ammo, they are worth nothing in storage. But if you need it there are no substitutes.
From the getgo Allisdair gets it wrong:
There is only one way to value gold, and that is to quantify the expansion of the fiat currency in which it is priced.Remember this guy is a Brit, and in general these guys just don't get it. As "American" americans; ie citizens of "these united States of america" recall that the definition of legal tender is prescribed in the other barbaric relic, The Constitution of the United States:
Article I, Section 8, Clause 5: “The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” [4] • Article I, Section 10, Clause 1: “No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.”
For example, the Coinage Act of 1792 authorizes "Eagles — each to be of the value of ten dollars or units [i.e., of ten silver dollars], and to contain two hundred and forty-seven grains, and four eighths of a grain of pure … gold." Since the dollar contained 371.25 grains of silver, this brought into legal equivalence 3712.5 grains of silver and 247.5 grains of gold. The ratio was 1:15.
...so Allisdair old chum,
...the only way to value a fiat currency is by the amount of gold in which it is pricedTo this end the math is quite simple, the perplexing bits are the numerator and denominator, specifically:
How many pieces of fiat are floating about in the system, divided by, How much gold is locked away in Ft Knox - no one is willing to audit either one because the answer would be very ugly.
A quick back of the envelope calculation says for every trillion of $US in the system (something entirely different from FMQ) and based on the alleged 8500 tons of Au (272 million oz) supposedly located in Ft Knox the gold price would be $3676 per oz and therefore the actual price would be 3676 x "N" trillions $US fiat in the system. This should also in clude all the digital FRNs used to manipulate the metals price as well as the stock price, bond yield curve and just about any other market on the planet. Taking the rumored "Quadrillion in bogus derivitaves" number gives us about $3.7 mil per oz.
Note this is a far cry from the $20 per ounce defined prior to the advent of the Federal Reserve wher the dollar has gone from being defined as 1/20 th oz to 1/3,700,000 th oz gold. And probably less than that, truth be known.