What is the fair price of gold? The answer can be obtained based on simple calculations.
I previously said that gold could reach $15,000 by 2026. Today I want to update that prediction.
Indeed, in my opinion, gold could perhaps exceed $27,000 per ounce.
I’m not saying this for attention or controversy. This is not a random estimate, it is the result of an in-depth analysis.
Of course, there is no guarantee that this will happen, but this prediction is based on the best tools and diagrams available, which have been proven correct in many other contexts.
Here’s how I arrived at this forecast price result…
This analysis begins with a simple question: what is the implicit, non-deflationary price of gold under a new gold standard?
No central bank in the world wants a gold standard. Why would they want it? At the moment, they are the ones who control the mechanisms of global currencies (also called “fiat currencies”). They are not interested in a form of money that they cannot control. It took them 60 years, from 1914 to 1974, to get rid of gold in the monetary system. No central bank would want to return to this system.
What would happen if they had no choice? What would happen if confidence in currencies collapsed due to a combination of excessive money creation, competition from bitcoin, extreme levels of dollar debt, another financial crisis, war or a natural disaster?
In this case, central banks could return to gold, not because that is what they want, but because they will have no choice in restoring order to the global monetary system.
What is the fair price of gold?
This scenario raises the question: What would the new dollar price of gold be in a system where dollars were freely exchangeable for gold at a fixed price?
If the price of the dollar is too high, investors will sell their gold for dollars and spend freely. Central banks will need to increase money reserves to maintain balance. This is an inflationary result.
If the price of the dollar is too low, investors will line up to buy back dollars for gold and then hoard the gold. Central banks will have to reduce the money supply to maintain balance: this will reduce the speed of circulation and be deflationary.
A similar event occurred in the United Kingdom in 1925, when the country returned to the gold standard at a disproportionately low price. As a result, the United Kingdom was hit by the Great Depression, several years ahead of other developed economies.
A similar event also happened in the United States in 1933, when Franklin D. Roosevelt devalued the dollar against gold. As citizens were not allowed to own gold, there was no massive gold buyback. But the prices of other raw materials have risen sharply.
That was the goal of the devaluation. The resulting inflation helped the United States emerge from deflation and allowed a boost of the economy between 1933 and 1936, in the middle of the Great Depression. (The Fed caused another recession between 1937 and 1938 thanks to its habitual incompetence.)
The political objective is obviously to obtain a “fair” price by maintaining the balance between gold and the dollar. The United States is in an ideal position to do so by selling gold from the U.S. Treasury’s reserves of approximately 8,100 metric tons (261.5 million troy ounces), or by purchasing gold on the open market using money freshly printed by the Fed.
The objective would be to maintain the dollar price of gold, within a range around the fixed price.
So what is this fair price? The answer to the question is simple, subject to a few assumptions.
$27,533
The US M1 money supply stands at $17.9 trillion. (I use M1, which is a good approximation of current currency.)
What is M1? It is the most liquid money supply and the easiest money to transform into cash. It includes cash (notes and coins), bank reserves (what is kept in vaults) and demand deposits (money in your current account that can be easily transformed into cash).
It is necessary to estimate the percentage of gold coverage of the money supply necessary to maintain confidence. I assume this gold coverage is 40%. (This was the legal requirement for the Fed from 1913 to 1946. Later it increased to 25%, then to zero today.)
If we apply the 40% ratio to the money supply of $17.9 trillion, that means $7.2 trillion worth of gold is required.
Applying the $7.2 trillion valuation to 261.5 million troy ounces yields a gold price of $27,533 per ounce.
This would therefore be the implicit non-deflationary equilibrium price of gold in a new global gold standard. Of course, the money supply fluctuates. Recently, it has increased significantly, particularly in the United States.
It is debatable whether a ratio of 40% is too high or too low. However, my assumptions are moderate and are based on monetary economics and history. A gold price of over $25,000 per ounce under a new gold standard is not exaggerated.
This works out to about $12,500 per ounce assuming a 20% hedge. But many variables come into play. We will see in our next article which variables they are.
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