How Much Is Gold Really Worth?

By: Kelsey Williams | Tue, May 9, 2017
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How much is gold really worth? The answer we get depends on who we ask and what their opinion is.

Everyone has an opinion as to what something is worth, whether the object of consideration is their home, a late grandfather’s pocket watch, or a specific stock. In that respect, gold is no different.

The price of a specific item or asset at any given time is a reflection of all those varying opinions. Some are based on fundamentals, some are based on technical factors. But the combination of all the opinions, and the resulting expectations (some expect the price to go up, others expect it to go down or remain the same), plus all of the other known factors at the time that might possibly impact the price, provide us with the clearest possible indication of current value for the item in question: its market price.

If we believe that gold is money, then we likely will have a different opinion or expectation than someone who sees gold as an investment; or someone else who deems gold to have no useful value.

If we don’t believe that gold is money, then we are saying that something else is. That something else, practically speaking, is fiat, paper currency issued by a government or central bank (dollars, euros, yen, etc.).

With that in mind let’s rephrase our original question. In other words, “How much is money worth?” In the simplest of terms, money is worth whatever it can be exchanged for. The value of money is in its purchasing power.

With that fundamental understood, then the logic is reasonably simple. Gold (or any other money) is worth what we can buy with it.

So, what can we buy with it? And how do we know that the value of our gold/money is realistically priced?

With gold currently priced at $1240.00 per ounce, the value of gold today is what we can buy with twelve hundred forty dollars.

But is $1240.00 per ounce today realistic? Or rather, are there reasons why we might expect that price to rise or decline to any substantial degree that would influence our choice to hold money in gold vs. U.S. dollars?

In order to answer that question, we need to do some research.

And, in order to diffuse any arguments about whether or not gold is money (and to set aside – as much as possible – any biases) let’s go back to a time when the U.S. dollar and gold were both money and equal in value.

In 1913, both gold and U.S. dollars were legal tender, and interchangeable. Either was convertible into the other at a fixed price. A one ounce (.97 ounces) gold coin was equal to twenty U.S. Dollars and vice-versa. (note: the official gold price was $20.67 per ounce, which multiplied by .97 ounce of gold in a gold coin equals $20.00).

On the surface, it would seem that one ounce of gold over the past one hundred and four years has increased in ‘value’ by fifty-nine hundred percent ($20.67 in 1913 vs $1240.00 today). By extension, that would mean that we can buy sixty times as much with one ounce of gold today as we could in 1913. Not so.

We said earlier that the value of money is what we can buy with it, or exchange it for, but it is probably (or should be) obvious by now that even though the ‘price’ of gold increased by fifty-nine hundred percent, we don’t know whether there was an increase in actual ‘value’, or possibly a decrease if gold was unable to maintain its original purchasing power.

We can still, however, draw some conclusions about relative performance. The specifics are that gold gained in value by fifty-nine hundred percent ‘relative’ to the U.S. dollar. The corollary is that the U.S. dollar declined by more than ninety-eight percent ‘relative’ to gold.

Now we need to know how both gold and the U.S. dollar fared in absolute terms regarding purchasing power. The results of the research are here.

And the results are clear. Gold has maintained its value, and even increased its purchasing power in absolute terms, over the century-long period under consideration. Also, the results corroborate the current market price for gold of $1240.00 per ounce.

What we don’t know is the extent to which the current price of $1240.00 per ounce reflects accurately the effects of policies which have led to our current situation. More specifically, exactly how much value has the U.S. dollar lost since 1913? Is it ninety-eight percent, or less; ninety-nine, or more?

The current market price for gold of $1240.00 per ounce indicates a fairly specific loss of ninety-eight and 1/4 percent. A ninety-eight percent decline in the value of the U.S. dollar translates to a gold price of approximately $1000.00 per ounce. And if the decline is closer to ninety-nine percent, then the gold price should be closer to $2,000.00 per ounce.

In August 2011, gold traded at about $1900.00 per ounce. That would indicate a decline in value of the U.S. dollar of closer to ninety-nine percent since 1913.

But nearly four and one-half years later, in January 2016, gold traded as low as $1040.00 per ounce. That price indicates a decline in U.S. dollar value closer to ninety-eight percent. In fact, it is nearly exactly equivalent to that mark. A ninety-eight percent decline in U.S. dollar value equates to a fifty fold increase in the gold price since 1913 (100 percent minus 98 percent = 2 percent; 100 percent divided by 2 percent = 50; $20.67 per ounce times 50 = $1033.50 per ounce).

Between 1999 and 2011, gold increased in price from $275.00 per ounce to $1900.00 per ounce. And during that same period, the U.S. dollar declined in value by a commensurate amount.

Between August 2011 and January 2016, the U.S. dollar was in a clearly defined uptrend. And that uptrend was mirrored by a similar percentage decline in gold.

Since January 2016, both gold and the U.S. dollar reversed direction for about six to nine months and then stabilized, generally, at levels close to where they are now.

CONCLUSIONS:

Gold, in U.S. dollars, is worth somewhere between $1000.00 and $2000.00 per ounce. Furthermore, and to be more specific, the current price of $1240.00 per ounce is a reasonably accurate reflection of gold’s current worth.

Any consequential variance exceeding $1100.00 per ounce on the downside and $1300.00 per ounce on the upside WILL BE accompanied by similar, inverse changes in the value of the U.S. dollar.

The U.S. dollar is the only barometer you need to watch. The elements of surprise and timing are critical. Most especially so, if you are short-term oriented in your thinking.

Items for consideration that could have a substantial impact on the U.S. dollar include 1) new and unexpected actions by the Federal Reserve 2) a clearer picture of the enormity of the Fed’s balance sheet 3) accelerated, delayed effects of inflation previously created by the Fed 4) a credit implosion 5) Fed’s reaction to a credit implosion.

Some of the listed items, or variations of them, can affect the value of the U.S. dollar positively, too. Which is why you need to keep your eye on the dollar, and not the specific event. (see Gold Price US$700? Or US$7000?)


 

Author: Kelsey Williams

Kelsey Williams
Kelsey's Gold Facts

Kelsey Williams is retired (2005) and living in Southern Utah. He has forty-five years experience in the financial services industry. In 1972 he acquired his first “real” money by exchanging some depreciating paper dollars for gold and silver coins. The U.S. dollar price of gold at that time was less than $70/oz and silver at $1.60/oz. He advised clients professionally between 1975-80 regarding similar acquisitions and has always counseled his clients throughout his financial planning career to maintain positions in gold. He enjoys swimming, reading, writing, and listening to music.

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