An Academic Analysis of Gold’s Historical Value


By Victor Sperandeo with the Curmudgeon


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:

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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.

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Curmudgeon: China Futures Firms Propel Gold Market to All Time Highs (04/24)

Sperandeo/Curmudgeon: What if Taxes and Interest Rates were included in U.S. Inflation Metrics? (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: Perspective on U.S. Inflation; 97 Year Analysis of the Fed and Asset Price Declines (12/22)

Sperandeo/Curmudgeon: Gold/Silver, U.S. Dollar, BRICS/OPEC+ Currency CBDCs (10/22)

Curmudgeon/Sperandeo: The 2022 Gold Conundrum – Investment Bank Manipulation or Strong U.S. Dollar? (07/22)

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

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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