Gold - did you know?

What Is The Real Price?



Gold crosses an all-time high, over $1,250 per ounce last week (as of June 2010). In dollar terms this is a very exciting psychological milestone, because all-time highs get the mainstream media’s attention when it comes to precious metals.

However, did Gold really reach an all-time high? This week I am going to give you some different ways to value an ounce of Gold.

LABOR ADJUSTED

In ancient times as far back as Egypt 5,000 years ago, an ounce of Gold would buy you one man’s life for life. Now link it to a man’s labor output with a comparison to Global populations right up until today’s times. I wrote the following in previous issues:

HOW MUCH GOLD IS THERE?

According to the World Gold Council FAQ's, up until the year 2009 all the Gold ever mined in human history equates to 165,000 tonnes. Over 60% of this Gold has been mined since 1950 from the world’s top ten Gold mining companies. One metric tonne equals 32,150.746 Troy ounces, which would give us approxi-mately 5.3 Billion ounces of Gold in troy ounce terms.


GOLD/MEN/LABOR HISTORICAL RATIO:

Gold is in relation to men’s labor; it takes real labor to bring it above the ground. In ancient Egypt 5,000 years ago Gold production was in proportional ratio per ounce to the global population. One ounce of Gold would purchase you one man’s life for his entire life; hence, one ounce would purchase a slave for life securing the purchaser the productive output (labor) of a man’s life for life.

Just above I mentioned there is approximately 5.3 billion ounces of Gold (which is above the ground up until today) from all of history combined. The current world population is 6.7 billion people, which gives us today a 0.79 ratio of people to total mined Gold. This ratio of one ounce per man throughout the last 5,000 years has stayed fairly well within a close range to global populations. So let’s say the ratio is one to one, which means for every 10 ounces of Gold you purchase today, you are effectively canceling nine people out of the market. Gold has always been the money of kings and rulers, so when we compare Gold’s link to wealth and wealth’s link to a man’s labor, we also need to consider that kings, rulers and governments have always controlled the people effectively by having control over the wealth of a nation. You see, Gold extracted from the earth’s crust above the ground throughout human history has always been directly linked to global populations.

Therefore, Gold above the ground can be mathematically calculated against global populations, for it takes men’s labor to produce Gold. - Thinking points here.

LABOR

The average annual salary in the United States is approximately US$41,000. Now if we do a broad calculation using 50 years of actual wage-earning potential, we arrive at US$2.05 million dollars (without inflation adjusting) earned for a lifetime’s work. Now link this with the historical average of one ounce of Gold per man, which now gives us another view of what one ounce could hypothetically be worth.

INFLATION ADJUSTED

Because inflation skews the real value of our money today, there are many different ways to also view the real Gold price. From my previous writings in regard to inflation of currency, you will no doubt realize that calculating the real Gold price is a tricky business to say the least.

During the last Gold bull market, Gold rose from US$35/oz in 1971 to over US$850/oz in 1980 for approximately a 2500% increase. Yet when we factor inflation into this equation using the Bureau of Labour statistics, we arrive at a staggering US$2,400/oz!

Now bear in mind this is government-reported inflation rates; the actual price is far higher. According to many other analysts, some claim as much as four times higher.

CONSUMER PRICE INDEX

We all know that the cost of living is on the rise, which is no surprise. One of the most common ways to track this is a measuring device known as the CPI defined by Wikipedia as:

A consumer price index (CPI) is a measure estimating the average price of consumer goods and services purchased by households. The CPI is a price index that measures a price change for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). It is a price index also determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer. It is one of several price indices calculated by most national statistical agencies. The percent change in the CPI is a measure estimating inflation. The CPI can be used to index (i.e., adjust for the effect of inflation on the real value of money: the medium of exchange) wages, salaries, pensions, and regulated or contracted prices. The CPI is, along with the population census and the National Income and Product Accounts, one of the most closely watched national economic statistics.

Again referencing the Bureau of Labor Statistics, have a look at this chart; Gold is just over half way to its 1980 high:

CPI adjusted gold price


The World Gold Council’s Jill Leyland concluded that “Gold and consumer prices have broadly kept pace with one another in the USA from the year 1800 to the present.”

I was not surprised to see the following results quoting the 1980 high for Gold over US$7,500/oz in today’s CPI-adjusted prices of shadow government statistics:

SGS CPI Adjusted Gold Price




HYPOTHETCAL POSSIBILITIES

Consider 5.3 billion ounces of Gold and multiply this by US$1,250/oz. We come up with US$6.625 trillion dollars for the total value of all Gold ever mined above the ground up until today.

Then take the total ounces of all the Gold ever mined in history (165,000 tonnes = approx. 5.3 Billion ounces) and divide it into the following to give us hypothetical per ounce figures of:

US Unfunded Total Liability (US$109.25 Trillion)= US$20,613.20c/oz

Total Currency & Credit Derivatives (US$620 Trillion)= US$116,981.13c/oz

US Total Debt (US$54.25 Trillion)= US$10,235.85c/oz

PAPER CHASING GOLD

Some of these examples literally go beyond my mind’s comprehension and probably yours as well. I could go on and on and use a myriad of other derivative asset items to measure against an ounce of Gold as I am sure you can also. Yet you are by now getting my point that there is an incredible amount of paper out there to chase Gold.

MYOPIC

Back in 1971 Gold was US$35/oz and then moved to US$150/oz by 1974. People in their wildest dreams could not fathom three-digit Gold prices from two-digit Gold prices to nearly four-digit Gold prices by 1980. Today’s Gold bull run started with three-digit Gold prices ($250/oz) and has now moved into four-digits (over $1,200/oz). Could it move into five-digit Gold prices?

DEBT PYRAMID

All paper assets today are promises to pay in the future; they literally are derivatives contracts created for a payment sometime in the future. All this paper has to go somewhere, and if it rushes towards Gold, there’s simply not enough around for everyone.

Inverted Debt Pyramid

In the future, just like a big game of musical chairs, when the music stops, not everyone will be able to sit down. Someone will eventually miss out!


SELLERS/BUYERS

If you are considering selling or are selling Gold today, you might want to sit back and evaluate what you are actually selling in value terms. If you are considering buying or are buying Gold, again the above is also worth considering as to just how undervalued Gold is when measured against other so-called assets of value.

GOLD IS MONEY

Gold is money. Without money, society as we know it will have no order. When there is no order, there is disorder which can lead to anarchy. This is why Gold is a commodity, because society needs money to function with order. When our current fiat monetary system comes into question, Gold automatically comes to the fore as the ultimate choice for money. Why? Because it is very difficult to tamper with, unlike paper money.

MONEY OF KINGS

Throughout history only the wealthy, monarchy, governments, dictators, rulers, institutions, some churches or nations have been able to afford the money of kings. However, in the last 100 years and especially the last 50 years, Gold has been within the grasp of the common man from the developed nations even if he has not known about it.

This is due to multiple reasons. History shows us that this is not the normal occurrence. For everyone reading this article, just sit back and take a good look around you and realize that you have been born into a slither of history where it is now within your grasp.

The question I ask is:

For how much longer will this window stay open?


Until next time,

Simon Heaps






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