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Two Methods for Estimating the Price of Gold

There are several different approaches to calculating a theoretical price for gold. The purpose of this essay is to calculate this figure using two different methods. For each, the total ounces of gold above ground will be divided by:
  1. The total amount of currency (physical paper money only)
  2. The aggregate sum of published M1 money supply (primarily currency and demand deposits) figures from the world's central banks

Amount of Aboveground Gold

According to GFMS Ltd, the aboveground stocks of gold at the end of 2007 were 161,000 tonnes. Jewellery makes up the largest component of this inventory. Much of this is in the form of 'monetary jewellery' for which the value is based upon the content of gold rather than its artistic value.

According to the September 2008 release from World Gold Council the total official gold holdings of the world's central banks and vaults of the International Monetary Fund and Bank of International Settlements is 29,783.9 metric tonnes, representing over eighteen percent of the total inventory.

Composition of the 161,100 Tonne Aboveground Gold Inventory

An average of an additional 2209 tonnes of gold (minus producer hedging) was added on an annual basis over the last five years. This represents a 1.4% annual inflation rate of the gold supply. The known reserves of world mining companies are estimated to be another 45,000 tonnes.

Amount of Currency in Circulation

A tabulation of the major currencies in the world converted into USD as of Oct 8, 2008 amounts to US$3.8 trillion. If we include the value of all demand deposits (approximated by using official M1 money supply numbers) the volume of the money expands to $18.4 trillion. The most recent official figures available were used for determining the values of the different currencies as shown in the table below.

Economic AreaM0 ($US Billions)M1 ($US Billions)Date
EU888.175007.46Aug-08
US775.401389.3Aug-08
Japan712.114700.03Sep-08
China443.862231.72Dec-07
Russia145.43201.83Jul-08
India129.64232.32Jul-08
UK87.931710.52Aug-08
Canada45.99364.94Aug-08
Poland43.12139.71Aug-08
South Korea41.25218.78Apr-08
Mexico37.61100.28Aug-08
Switzerland31.82227.39Aug-08
Australia28.97164.64Aug-08
Ukraine26.9338.97Aug-08
Taiwan24.3695.18Aug-08
Brazil24.3649.45May-08
Thailand24.0928.9Jul-08
Argentina23.0837.48Sep-08
Turkey22.5143.45Sep-08
Saudi Arabia20.42111.33Aug-08
Egypt19.8732.01Dec-07
Indonesia19.6547.68Jul-08
Czech Republic18.2688.62Aug-08
Sweden15.02195.14Aug-08
South Africa12.5581.13Aug-08
Pakistan12.4044.84Sep-08
Singapore12.0349.81Jul-08
Malaysia11.5449.87Aug-08
Hungary10.9432.81Aug-08
Denmark9.32144.13May-08
Venezuala8.7648.45Sep-08
Colombia8.3916.69Sep-08
Romania8.3431.68Jul-08
Nigeria8.0436.14Aug-08
Philippines7.7618.83Mar-08
Norway7.25123.2Jul-08
UAE7.0649.46Dec-07
Israel6.7818.79Dec-05
Slovakia5.8426.18Jul-08
Bulgaria5.4514.63Aug-08
Peru5.377.61Aug-08
Bangladesh4.898.72Jul-08
Chile3.5816.53Dec-07
Lithuania3.2410.21Aug-08
Kuwait2.9317.38Aug-08
Sudan2.164.97Dec-07
Belarus2.014.83Sep-08
Latvia2.007.10Jan-08
New Zealand1.8514.14Aug-08
Sri Lanka1.362.47Dec-07
Lebanon1.242.44Jul-08
Estonia1.086.93Aug-08
Moldova0.711.13Aug-08
Iceland0.124.05Aug-08

Please note that some of the data is less current (i.e. latest data for China is from Dec 2007) or simply unavailable (i.e. Iran).

A previous analysis of the 25 largest economic regions of the world in July 2008 suggests an annual inflation rate of 6.6% for the paper money.

There is no limit to the amount of currency a country can issue, but its value is determined by the public's collective confidence. The severe socio-economic destruction caused by hyperinflation occurs when this value approaches zero. A list of failed currencies can be found here.

Estimating a Price for Gold

A troy ounce is 31.1 grams, thus the 161,000 tonnes of gold is equal to 5,176 million ounces of gold. Dividing the total amount of currency (US$3.8 trillion) by 5,176 million ounces gives us a figure of US$738 per ounce. add to technorati  | reddit  | add to del.icio.us  | add to furl  | stumble it!

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Posted in Gold, Mike Hewitt

2007441
 
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