US dollar vs the gold it could be backed with

Discussion in 'Commodity Futures' started by jbtrader23, Nov 6, 2003.

  1. I normally laugh at these gold bug, "the sky is falling, gold is going to $50,000 an ounce" type articles, but I thought this arguement was interesting:

    From 1998 to 2003, M3 has jumped from $5,700 billion to $8,900 while gold has gone from $296 to $390 an ounce. Since 2001, gold has gone up faster than M3. This means the value of money is going down faster than the rate at which they can print it?

    The US stockpile of gold is estimated at 260 million ounces (Fort Knox). When you divide current M3 by the gold price, it means the US dollars can buy 22 billion ounces of gold. Yet there are only 3-4 billion ounces of gold in the entire world!!

    Could you conclude then that since coming off the gold standard, the US dollar is currently overvalued by 500-700%?

    I know that numerous countries in history have debased their currency, gotten off gold or silver standards (the Romans using less silver in their coins at the end of their empire, etc). But I wonder if any country in the world has had this large a gap between fiat currency and actual hard metals to back them up. To think that you use to be able to exchange a US dollar for actual gold seems almost unimaginable. This house of cards is going to crash sooner or later.
  2. hard to say but gold stocks and the xau not looking so hot right now.the gold rally looks done to me unless some bad news favorable to gold comes out.
  3. don't fight the the dips.....sell the USD....given bush's appetite for "fighting evil-doers" the deficit will continue to grow....
  4. The value of the dollar (or most currencies) seems to have little to do with the amount of metal stored in a vault anymore. Anymore than the value of diamonds has to due with their rarity (diamonds are actually very common - DeBeers's monopoly and hording keeps market supply controlled and prices high).

    Rather it seems that the value of gold is governed more or less by the value of the dollar (devaluation of the dollar relative to other major currencies seems to be followed by gold price increases, rather than gold leading dollars). The Euro contract with the Gold contract (both priced in dollars) and allowing for the impact of gold and/or euro speculation, there's a decent correlation at least from a similarity of their price curves - might be interesting to see what the ratio curve of Gold vs. Euro looked like.
  5. pspr


    Actually you would want to use currency in circulation, not M3 for making your calculation. Presently there is just under $700B of U.S. currency in circulation.

    Regardless, the gold/currency relationship is for the most part irrelevant.


  6. What house of cards are you talking about? Are you talking about your theory on inflation? I hope you are, because your view of gold as a standard of value for our fiat currency is about as well thought out of theory as people who buy investments because they are recommended in Forbes. Gold only has the value that we give it, the standard could just as easily been a diamond, or ruby, or silver, or even a cow pattie relation.

    Do you really think that the whole world will be prevented from self-destructing on a gold standard? Last I remember, we went through numerous wars, plagues, etc, and the great depression on the gold standard. You shouldn't have fallen asleep in your Intro to Macroeconomics class at Bunker Hill Community College because then you would understand the difference between controlling our internal balances (Unemployment, Msupply, fiscal deficits, etc.) VS external balances (current & capital accounts, etc) on a gold standard VS a fiat currency (ie floating exchange rates).

    I also hope that you are not using this as a rationalization for investment in gold either, because fundamental analysis alone of a market traded vehicle is not a rote process or else we all would be rich....!
  7. I don't own any gold or gold shares. Supply and demand is not as favorable today compared to the 60's before gold skyrocketed. Setting the price at $35 an ounce was a great way to reduce the incentive for people to mine for gold. So supply was flat to down while demand kept going up (in part due to golds industrial use). These dynamics are not in the current marketplace.

    But I thought the arguement was interesting as a way to view the US money supply exploding relative to a metal that it was once backed by. Total US money supply has clearly exploded in the last 30 years since Nixon took us off the gold standard. Would the credit machine of Greenspan/Fannie/Freddie Mac, etc be possible if our dollars could be traded in for gold? Of course not.

    The house of cards I was referring to was this explosion of US money supply and the inevitable decline in the US dollar as a result of it. Whether gold will skyrocket as a result is hard to say. Other commodities could outperform quite easily.

    Diamonds are a horrible investment- talk about a house of cards. Artifically created demand (A diamond is forever!!) coupled with the monopoly power of DeBeers.
  8. Your thoughts on the dollar and the many other similar opinions I have read are the reason that I posted this very brief statement about my theory on the state of the economy right now.

    As a point of fact, of course the Msupply has grown faster than the relative rate of value of gold. If it had grown more slowly I bet you would be expounding the virtues of market capitalism. The reason we abandoned the "gold-exchange standard" in the 70's was so that we could better control our economy internally (biz cycle) and externally (trade bops) whereas on the "I dont understand economics gold standard" we had to work with a handicap of not having ANY control over the direction of the domestic economy. I know what you are going to say next about Alan Greenspan and the markets but I guess he ruined your little irrational exhuberance party and should have let the markets run to 20000 then pop. I don't necessarily agree with how he handled his intervention, he could have raised margin requirements for accounts under $100,000, but the discount rate is just a sentiment indicators anyways, right? Plus what about population growth? Where is your chart tracking pop growth to Msupply? Where is inflation in the consumer sector? I can get a Dell for 499 (no damn mail in rebates), in fact, most consumer goods prices have fallen over the past 10 years. Where is this inflation? When is the sky falling again, chicken little?

    The total measure of world GDP (2002) is 31.5 Trillion! The US has a GDP of about 10.5 Trillion, yeah, thats right, one third of world output. In distant second is Japan at 5 T and then everyone else doesn't matter. So remember that, people, when you want to change our monetary system. Remember that fact when you criticize our foreign policy, because we are huge and might makes right. Remember that when you criticize the Fed that has to understand that their actions affect the world economy not just Jerkwater, Georgia. IF IT AINT BROKE DONT FIX IT. We must be doing something right...
  9. "Where is this inflation"

    mostly in services. housing,health care,insurance,drugs,local taxes,energy,user fees of all kinds,higher education,building materials, most commodities.
  10. Yeah your right, I am going to write a paper about your conclusion and I am also writing my Nobel acceptance speech too...

    #10     Nov 7, 2003