An Academic Analysis of Gold’s Historical Value
By Victor
Sperandeo with the Curmudgeon
Introduction:
This is a follow up to last week’s article on gold. Ask 10,000 people what gold is valued at on U.S.
government books and they have no idea what you’re talking about. And what is
the REAL value of gold? We’ll try to
explain that and much more in this article.
Some Facts:
·
Gold is actually
a scarce element “AU” (#79 in the Periodic Table). It has been sought after due to its scarcity
for over 5,000 years, mainly by Kings/Queens, Dictators, Heads of State,
etc.
·
Gold has been used as money
and jewelry virtually everywhere in the world. For example, the U.S.
Constitution permits States to pay their debts in gold coins.
·
Gold has proven to be a CHAOS
AND INFLATION HEDGE over many time periods.
·
Gold is insurance against the
political system if you hold it physically (as coins or bullion).
·
Gold has no counter-party
risk. If you hold it, you control it.
·
Everything else is credit and
can disappear while you sleep.
·
The U.S. holds more (stated) gold
than any nation in the world at 8,133 metric tons. It values its gold holdings at 55 times LESS
than the price of spot Gold. The value on the books is
worth $11,039,772.140.4. However, no
audit of U.S. gold holdings has been conducted since September 20, 1974.
·
The largest gold holdings of
major nations are as follows1:
U.S. 8.133, Germany
3,352.65, Italy 2,451.84, France 2,436.97, Russia 2,332.74, China claims
1,948.31 tons (it’s probably much more than that).
Note 1. All Gold holdings are
presumed to be “metric tons” in troy ounces.
Gold’s Price History in the U.S.
Gold’s “official” value in the U.S. was politically derived
until 1974. It was whatever the U.S.
President and Secretary of the Treasury wanted it to be. Historical gold prices were as follows:
1793 = $19.39, 1834= $20.69, 1862 =$27.35,1863= $31.23, 1879=
$20.67, 1933 =$32.22 1934=$35.00, then minor price changes around $35 till
August 1971 when U.S. went off the gold standard, officially $42.22 till 1973,
then free trading in 1974. Source: “ONLY GOLD.”
From 1934 till 1971, gold in the U.S. was valued at ~$35 per
troy ounce. After President Richard Nixon took the U.S. off the International
Gold Standard on August 15, 1971, gold’s value was arbitrarily changed to
$42.22 per ounce.
The Commodity Exchange (COMEX) in New York city
began trading gold futures on December 31, 1974. In 1974, the ban on US
citizens owning gold bars was lifted, allowing them to trade gold for the first
time in 40 years. Victor started trading Gold at that time, while the
Curmudgeon traded COMEX Gold futures in 1984 and 1985.
Here’s a chart
of Gold’s price from January 1975 to date:
Source: GOLD PRICE
............…..................….........…............…….…..................…...............…
The Value of Gold:
Today, the value of gold is totally subjective (as are all assets) and is determined day to day by the
world markets (mostly in London, New York, and China). But it wasn’t always like that….
Gold’s value in the U.S. was previously very political. The U.S.
Constitution was arbitrarily violated by FDR in 1933. Executive Order 6102 required U.S. citizens to give up most of
their gold coins, bullion, and certificates to the Federal Reserve by May 1, 1933,
for $20.67 per troy ounce. The order made it illegal for citizens to own or
trade gold anywhere in the world, with some exceptions for jewelry and
collector's coins. Violating the order could result in a fine of up to $10,000
as gold held by U.S. citizens was confiscated.
Gold’s value was changed to be a “Fiat Standard of Paper
Currency,” using Federal Reserve Notes. After 1971, gold was allowed to be
owned and traded freely again but was handicapped by methods and laws to keep
the price down. For example, the U.S. long term capital gains tax on gold is
28% - or 40% higher than other long-term gains (including Bitcoin) which are
taxed at 20%.
Victor would value gold academically, based on what it used
to represent - a U.S. paper dollar which was a receipt for the actual
redemption of gold’s physical value based on the printed dollar amount on the
certificate. Based on the growth of the M2 money supply, the increase in U.S.
fiat paper currency was 2,964% since August 1971 when the U.S. went off the international
gold standard (and gold was repriced at $42.22 per ounce).
However, since gold was suppressed by the U.S. government, Victor
takes the base year as 2023 and $2,000 as the starting price. On that basis,
Gold would’ve increased by $2,000 x 2,964%/100 = $59,280 since August 1971 with
a theoretical price of $59,322.22.
If you take August 1971’s price of $42.22 as the starting price,
the increase is 2,964%/100 x $42.22= $1,251.40 an ounce which results in a much
lower price of $42.22 + $1,251.40 = $1,293.62.
We will let the reader
decide what gold’s actual value should be.
Paper Currencies vs. Gold:
It should be noted and understood that all paper currencies
in the history of mankind eventually have gone to zero as their purchasing
power declines over time. For example,
the buying power of $100 in January 1971 is now only $11.74 or minus
-88.26%! That’s based on the CPI
compounding at +3.94% annually over that period.
-->Contrast that with gold, which is compounding at +
8.25% a year. Therefore, $100 then is
worth $6,816.24 in buying power now.
Buffet’s Disagree on Gold:
Warren Buffett one of the greatest investors in the world, dislikes gold as he doesn't think it fits in with
his strategy of value investing. In a
2011 letter to Berkshire Hathaway shareholders, he wrote:
“Gold … has two
significant shortcomings, being neither of much use nor procreative. True, gold
has some industrial and decorative utility, but the demand for these purposes
is both limited and incapable of soaking up new production. Meanwhile, if you
own one ounce of gold for an eternity, you will still own one ounce at its
end.”
In the letter, Buffett lays out three types of investments,
placing gold squarely in the second category, which involves “assets that will
never produce anything.” Buyers purchase these assets, according to Buffett,
with the hope that someone else will pay more for them in the future. “Owners
are not inspired by what the asset itself can produce — it will remain lifeless
forever — but rather by the belief that others will desire it even more avidly
in the future,” he states in the letter.
In sharp contrast, Buffet’s late father Howard Buffett, a
four term Congressman from Nebraska, thought very highly of gold and what it
represents:
“Observing that “one of
the first moves by Lenin, Mussolini and Hitler was to outlaw individual
ownership of gold,” while tactfully not mentioning that President Roosevelt did
the same thing in 1933, Howard Buffet goes on to conclude that “you begin to
sense that there may be some connection between money, redeemable in gold, and
the rare prize known as human liberty.” This connection exists because: “In a
free country the monetary unit rests upon a fixed foundation of gold or gold
and silver independent of the ruling politicians.”
Victor’s Conclusions:
Gold’s actual value is highly debatable, and NO answer is
correct! Nonetheless, there are several defining points of order:
·
Gold preserves wealth via
stable buying power and as INSURANCE or HEDGE against catastrophic unknown
events.
·
Gold increases in buying
power/value when currencies decline in buying power, but not on
a monthly basis.
·
From January 1914 to date the
U.S. CPI increased at 3.18% per year, while gold appreciated at 4.40% per year.
·
Gold is owned to be a long-term
inflation (and chaos) hedge. It is not
meant to compete with the NASDAQ 100!
End Quote:
“Who controls the food supply controls the people; who
controls the energy can control whole continents; who controls MONEY can
control the world.” Henry
A. Kissinger (May 27, 1923 – November 29, 2023) was an American diplomat,
political scientist, geopolitical consultant, and politician who served as the U.S.
Secretary of State and national security advisor in the presidential
administrations of Richard Nixon and Gerald Ford between 1969 and 1977.
.……………………………………………………………………………………………………….
References:
Curmudgeon: China Futures
Firms Propel Gold Market to All Time Highs (04/24)
Sperandeo/Curmudgeon: Is Gold
Still an Inflation Hedge? (05/23)
Sperandeo/Curmudgeon: Market
Review; Seasonally Adjusted Numbers; Gold as an Inflation Hedge (02/23)
Sperandeo/Curmudgeon:
Gold/Silver, U.S. Dollar, BRICS/OPEC+ Currency CBDCs (10/22)
Sperandeo/Curmudgeon: Why are
Gold and Silver Lagging Inflation? (11/21)
Sperandeo/Curmudgeon: Gold
vs. Bitcoin – Which One Will Survive (04/19)
Be
well, good health, success, and good luck. Till next time……………
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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