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Which Currencies are the Most Overvalued Against Gold?

In Currency, Inflation, Money Supply on July 15, 2011 by CQCA

Ever wonder what the price of gold would have to be if governments wanted to back up the full money supply? It is really only a simple matter of division, the hard part is finding the data.

The World Gold Council provides data on gold reserves by country. (Free registration is required to see their data.) I took the gold reserves of each country, and then matched them up with the data I used to calculate the money supply growth of most countries’ currencies between 2005 and 2010. I then used the current price of gold in each currency to calculate how much each currency would have to be devalued in order for that government to establish par between its money supply and gold reserve. The results are below.

The IMF issues SDRs, or Special Drawing Rights, which are magical receipts for something—no one is quite sure. The IMF has issued 182 billion SDRs, and has 90 million ounces of gold, which means the price at par would be about 2,000 SDRs per ounce. The current price in SDRs (.6343 SDRs to US$1) is about 995 SDRs per ounce. This means that the IMF would need to devalue the SDR by 50% in order to establish a par price.

Venezuela came in second because it recently devalued its currency by half against the U.S. Dollar.

The United States Dollar came in 24th place, at 95.3658% devaluation. Put another way, $100 in the future could possibly only buy $4.63 worth of goods today.

China came in 69th place, at 99.5262% devaluation. Put another way, 100 Yuan in the future could possibly only buy 0.47 Yuan worth of goods today.

Hong Kong is the biggest loser, at 99.9885% devaluation. Put another way, 1,000,000 HKD in the future could possibly only buy 115 HKD worth of goods today. I also wrote earlier about how the money supply of the Hong Kong Dollar has grown much faster than the U.S. Dollar’s, meaning the fixed price of 7.8 HKD to 1 USD over the last 14 years is nowhere near reality.

There are a few things that need to be said about these results. The first is this only considered gold. Most of these countries have foreign exchange (like Hong Kong), so if the U.S. Dollar were tied to gold, and other countries held U.S. Dollars, their “gold holdings” would increase, and therefore change the results.

Another problem is that gold has almost never been par to the entire money supply of a country. A full devaluation of this magnitude would indicate a complete collapse of humanity’s confidence in the monetary system. A much more likely scenario is that currency is completely devalued and we then go back to bartering chickens. Decades later we can start to rebuild the gold standard. Ever seen the movie Water World? If you watch it backwards, you will see that “water” is a metaphor for “inflated currency.”

The biggest problem, though, is that the data I used relies on the assumption that governments of the world are honest about their gold holdings. Ha.

4 Responses to “Which Currencies are the Most Overvalued Against Gold?”

  1. CQ,

    I don’t know if the data exists, but I’d be very curious to see what Iran’s ratio looks like. I have a theory that any country who isn’t up to their eyeballs in debt and has resources we want automatically goes to the top of our enemies list.

    • According to the World Bank, Iran’s M2 in 2009 was IRR 1,469,993,700,000,000. The current price of gold is about IRR 15,913,000 per ounce. Iran currently has an (estimated) 16,075,000 ounces of gold. For a full par price, Iran would have to set the price of gold to IRR 91,445,953.

      If my math is correct, that is an 82.5% devaluation.

      I wouldn’t be worried about Iran. They have to export crude oil to import refined petroleum. That is not a recipe for success.

  2. It doesn’t seem relevant as comparing the total value of the worlds gold supply to the worlds monetary base overvalues the gold. There are multiple trillions of people on earth using various commodities daily. From this perspective the money supply really has to be compared to the values of all businesses, commodities, and indeed property in general world wide. Gold is just another commodity at this point- a significantly less important one than say oil.

  3. Value Major,

    Currencies are commodities. That’s why the Forex trades $4 Trillion per day. Think about how much anxiety goes into trying to figure out how to value one fiat currency against another. All the politics, monetary policy and everthing else. When the “business” of figuring out what somebodys’ money is going to be worth becomes a business, something is probably wrong.

    That’s why gold works as money. It removes those politics from the equation.
    Like it or not, people are waking up to that fact.

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