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Marc Faber is Right About the Price of Gold in 2011.

In Investment Returns, Money Supply on July 5, 2011 by CQCA

In a recent interview, Marc Faber, a well known investor and author of the Gloom, Boom, and Doom Report, stated:

“My view is, yes, I have been positive for gold for the past 10 or 12 years and I could make a case that gold today is cheaper than it was in 1999 when it was at $252. Cheaper in the sense that if I compare gold to international reserves or to the increase in the credit markets in the world, I don’t think it’s expensive.”

I did the math on the monetary base and the price of gold. The results are shown below.

The blue line shows how many billions of ounces of gold it takes to equal the U.S. monetary base. The monetary base is made up of currency in circulation and bank reserves. One Dollar placed in the monetary base will usually multiply into more Dollars as it moves higher up in the money supply, so it is a better indicator of future inflation than the overall money supply.

The lower the line on this graph goes, the more expensive gold is; and the higher the line on this graph goes, the less expensive it is. In 1980, the price of gold averaged $612.56, and the monetary base stood at $144 billion, so the monetary base was worth 235 million ounces. In 2001, the price of gold averaged $271.04, and the monetary base stood at $639 billion, so the monetary base was worth 2.36 billion ounces.

Below is the bi-weekly ratio of the monetary base to the price of gold in 2011.

On June 29, 2011, the U.S. monetary base was worth 1.75 billion ounces. This is only slightly lower than the 1998 ratio of 1.76 billion ounces. Even though the Dollar price of gold has increased over 400% between 2000 and 2010, in terms of credit expansion, gold is essentially as cheap today as it was when the average Dollar price was $294.24. Marc Faber is correct.

Also, if we wanted to calculate how high the price of gold would have to go before it reached a 1980 style bubble, we could set the ratio’s equal to each other. Or, in equation form:
(1980 high point)/(1980 monetary base) = (equivalent high point)/(current monetary base)
($850)/$133,436,000,000) = (X)/($2,645,989,000,000)
X = $16,855

Meaning, the current price of gold would have to reach $16,855 before it is anywhere near the bubble territory it reached in 1980. The closing price yesterday was $1,511.

Update July 14, 2011: Gold is not money.

4 Responses to “Marc Faber is Right About the Price of Gold in 2011.”

  1. […] If you check out this post and the chart, you’ll see that the monetary base = about 1.75 Billion Ounces of gold, or right about where it was in the early 1970s.   That was the beginning of a 2000% move. […]

  2. This is some great work!

    I think it really puts the current gold price in perspective.

    Thanks!

  3. […] Das bedeutet, dass wir einen Goldpreis von 16.855 Dollar pro Unze Gold erreichen müssen, bevor wir im Vergleich zu 1980 von einer Blase sprechen können. Aktuell steht Gold auf 1570 Dollar. [Quelle] […]

  4. […] Das bedeutet, dass wir einen Goldpreis von 16.855 Dollar pro Unze Gold erreichen müssen, bevor wir im Vergleich zu 1980 von einer Blase sprechen können. [Quelle] […]

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