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Gold Doesn’t Look Overvalued Now.

In Debt, Investment Returns on August 1, 2011 by CQCA

In 1950, the U.S. national debt was $257 billion. The average price of gold that year was $34.72 per ounce. At the end of 2010 (fiscal year), the U.S. national debt was $13.5 trillion, or an increase of 52.70 times from 1950. The average price of gold in 2010 was $1224.53, or an increase of 35.27 times. As the graph shows, the increase in the price of gold has been dwarfed by the increase in the national debt.

The current national debt is estimated at $14.3 trillion. If the price of gold were to return to the same ratio that existed in 1950, the equation would be:

($34.72 per ounce/$0.257 trillion) = ($X per ounce/14.3 trillion)
X = $1,931.89 per ounce.

The closing price today was $1,620 per ounce. Even though the nominal price of gold is at historic highs, in terms of the national debt, the current price is still undervalued by 16% against the 1950s ratio.

Considering both U.S. political parties have indicated that they are unwilling to put an upward limit on the national debt, we should be safe in assuming that there will be no upward limit on the U.S. Dollar price of gold.

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