Edgar J. Steele
March 28, 2005
What is gold really worth today? While the accurate answer simply
is whatever someone will pay for it, there are historical
measures which indicate that it is seriously undervalued. Could
it stay that way? Only if the central bankers are correct in
what they tell you about gold and also are correct that economic
depression and monetary hyperinflation are things of the past.
Even so, the gold market will require ongoing rigging, because
there are a great many people around the world who quite simply
don't believe the central bankers - and with good reason.
I'm going to go through a quick analysis of the value of gold,
one of many ways in which a value can be derived, I might add.
It almost certainly will require you to read through it a few
times to get the drift, because it is not the point of this article
to be an exhaustive treatise on gold or investing, after all.
Rather, I wish only to construct an argument for gold being used
as a defense against the economic war being waged against us.
By 1945, 63,570 tons of gold had been discovered and mined, worldwide.
In 2003, 144,092 tons existed, a 127% increase. Very little gold
actually is used industrially or otherwise (as in dental work),
unlike so many other precious metals, so most of the gold ever
discovered still exists and is sitting in someone's vault.
In 1945, 68% of all gold was in central bank vaults. In 2003,
12% of all gold was in central bank vaults.
The total outstanding value of gold outside bank vaults in 2003
was about 100 times the total outstanding value of gold outside
bank vaults in 1945.
In 1945, the total money in circulation throughout the world
was about $300 billion. In 2003, the total money in circulation
throughout the world was about $30 trillion, a one-hundredfold
increase, which itself suggests a proper price for gold in the
area of $3,500 per ounce (100 x $35).
Expressed as a pro-rata portion of the total money in circulation
in 1945, each ounce of gold then in existence accounted for $147.48.
Expressed as a pro-rata portion of the total money in circulation
in 2003, each and every ounce of gold then in existence accounted
Some would call the analysis done at this point and claim that
gold is worth between $3,500 and $6,506 per ounce. I am not one
of those, some of whom use alternate analyses to derive values
of up to $20,000 per ounce.
By the way, some actually suggest that the correct analysis is
to divide the total money supply by the number of ounces of gold
in central bank vaults, since that represents the extent to which
outstanding money is "backed" by gold. In that case,
the per-ounce value of gold turns out to be an incredible $54,218.94.
However, this neglects to calculate a similar figure for each
country with money outstanding, then weight each result appropriately.
Some countries, such as America, reportedly have almost no gold
left in central bank vaults, though none will allow inspections.
America's Consumer Price Index (CPI) in 1945 was 18. The CPI
in 2003 was 183, representing a 10X increase.
America's Gross Domestic Product (GDP) increased by 9X from 1945
to 2003, after adjustment for inflation (CPI).
The world's money supply, expressed in dollars, increased 100X
from 1945 to 2003. America's broadest definition of money, M3,
increased by about 36X during the same period.
Note that the money supply increased significantly faster than
did either GDP or the CPI or, for that matter, America's population,
which has doubled.
The Dow increased by 10X during the same period, too.
While American post-WWII productivity increased by about 3X on
a per-capita basis, the money supply (M3) increased beyond productivity
by a factor of ten, which squares with the CPI increase. When
I was a child, those purple first-class postage stamps cost 3
cents, but today they are more than ten times that amount, an
external validation of our statistical analysis. I recall today's
$1 ice cream cones costing but a nickel a scoop.
In other words, our money has been robbed of 90% of its value
in the last fifty years by excessive expansions of the money
supply, with most of the loss taking place in just the last 30
years. Meanwhile, the per-capita supply of gold actually has
declined by about 40%. What's the problem, you might ask - after
all, gold went up from $35 to $330 in the same time period, approximately
the amount of inflation. Here's the problem: at both points,
the price of gold was being artificially constrained by the central
bank, both directly and through its surrogate, the American government.
The real question is what happens to the price of gold if the
bank loses control of it and, particularly, if the dollar swoons
significantly, as seems to be occurring at the time of this writing.
Yes, this is the way financial analysis is done. Assemble all
the relevant statistics, analyze them with statistical devices
like regression analysis, adjusting for extraordinary events
and external manipulation. Move them around on the table before
you, trying the pieces in different positions, like a jigsaw
puzzle. Eventually, a picture emerges. Only then is a rationale
developed to fit the result that one thereby intuits.
What I have done herein is a very clumsy approximation of that
procedure, if indeed it can be dignified with so organized a
word as "procedure." Nevertheless, a picture has emerged
and I am pretty confident of its parameters.
Clearly, the current price of gold represents about the lowest
it ever has been, when adjusted for the various factors we have
considered. Therefore, it represents an eminently safe vehicle
for getting through the coming economic meltdown. The wild card
is its up side, which could be significant. It seems safe to
say that gold will see some serious swings, but that they will
be upwards and almost certainly never again below the current
In Roman times, an ounce of gold could buy you a good suit of
clothes, it is said. The same was true in 1929. Today, a good
man's suit will cost between $1,000 and $2,000. By the "suit
theory" alone, gold has a long way to go.
If gold were to take over the job of money in today's economy,
all other things being equal, its value most assuredly would
go to somewhere between $6,000 and $10,000 per ounce. However,
there are other vehicles of value that would also pick up the
slack, such as silver and platinum and backhoes and seed corn
and...well, you get the idea. But gold needn't step into the
breach; the dollar need merely abdicate its position as the world's
reserve currency, as now seems inevitable. Gold will be revalued
to the levels that it would assume if it and the other precious
metals were the only medium of exchange, even though some form
of fiat money inevitably will be thrown into the breach.
I spent a lot of time in my earlier life analyzing stock and
bond price movements, then financial statements from both a corporate
treasury standpoint and that of a bookkeeper and an auditor.
I learned that, like everything else, accounting and finance
is an art. I cannot articulate precisely how I calculate the
ultimate value for gold that I have, but I feel pretty good about
its validity. The danger of exact formulae is in the likelihood
of error creeping in. Broad-brush analysis, such as this, keeps
the entire forest firmly in view at all times. Yes, I could throw
some calculations down here and derive the very numbers I am
about to give you, but in honesty that would be contrived. Contrived,
that is, as in precisely how financial analysts always have plied
I believe that gold will spike to as much as 3 or 4 thousand
dollars per ounce in terms of today's dollar, no later than 2010
and probably much sooner, then settle in at around $1500,
in terms of the dollar's 2005 purchasing power. I see $1000 as
the likely bottom of gold's ultimate range, which itself provides
a profit potential in excess of 100% over today's price.
Checking Our Work
A "sanity check" of my valuation can be made by updating
the price of gold from some past point in time to today, using
something that reflects the general decline in the purchasing
power of the dollar. The problem is in getting accurate figures.
Roosevelt pegged gold at $35 in the 1930s and kept it there through
the end of the war. Many believed that to be a fair price at
the time. If so, then simply multiplying $35 by the 36X increase
in the M3 money supply yields $1,260 per ounce. Pretty close.
Another "sanity check" can be derived from the price
of gold in the mid 1970s, which ranged around $150 per ounce,
probably a pretty good free-market-driven price from just prior
to the massive inflation of modern times. The Dow-Jones Average
bottomed out in 1974 at about 575 and likewise probably was a
pretty good derivation of free market forces. Today's Dow is
hopelessly bloated by the monetary inflation of the past several
years, so cannot be used directly. Fundamentals dictate, via
traditional price-earnings ratios, a proper level today for the
Dow of about 4,500. This can quickly be calculated simply by
dividing the historical "square-up" corporate stock
price-earnings ratio of 12 by today's average price-earnings
ratio of about 28, then applying the resultant fraction to today's
Fundamentals, remember, are what square up stocks with other
forms of investments. Applying our adjusted increase in the Dow
of 683 percent to the 1973 gold price of $150 yields $1,025,
a conservative figure in that the earlier period's bottom for
the Dow is used in the calculation. Using other Dow figures from
the 1970s produce today's gold value as ranging up to around
$2,000 per ounce.
Since gold will, as pointed out above, likely spike well above
$1,200, if one chose to bail out at, say, $3,000, then real estate
likely will be the safest transition investment at that point,
particularly if real estate values continue with the very recent
deflation which now seems to be taking hold. If the stock market
has crashed, as in 1932, then buying a bundle of penny Blue Chips
could prove to be very advantageous in the long run. Staying
in gold, of course, is the sure bet, just as always.
The Real Allure
Is gold safe? You bet. In fact, it looks to be one of the best
investments around just now, with silver's fundamentals even
better. But the central bankers don't want you to know that.
This becomes even more urgent if one takes the view, as do I,
that we have seen America's "last hurrah," with other
nations, particularly China, assuming the ascendancy in world
financial affairs as we move into the future. Stripped of its
value, the dollar likely never will recover. An emergency "escape
pod" from the trap that the American economic system is
becoming is a necessity today. Gold can serve as that escape
Edgar J. Steele
Racism" (ISBN 0-9761259-0-0,
ProPer Press, 2004) a book by noted American civil rights attorney
Edgar J. Steele, who, in a former life, earned a BA in Finance,
an MBA in Accounting and worked for a time as a Financial Analyst
for a major firm).