A Wet Blanket For The Gold-Is-Money Folks

One of the arguments for gold being underpriced, even at these levels, assumes a restoration of the gold standard. For example, "Crisis Maven" in a rebuttal of the gold-bubble case. The figure derived, using the U.S. monetary base and a guessitmate at the amount of gold called forth by the gold standard, was about $18,000 an ounce.

There are similar calculations, like one from this article, whose figures are as of a year ago:

U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we’d arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce....

All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price.

I whipped up a similar calculation of my own, using more pessimistic assumptions, but I also assumed that both the U.S. and the Eurozone would adopt the gold standard for their M1 money supplies. It's more generous than the U.S.-only argument, but it leaves out the rest of the world: Japan, the PRC, the U.K., Canada, Australia, etc. It builds upon the methodology used by "Crisis Maven."

There have been 160,000 tons of gold mined throughout history. Instead of "Crisis Maven"'s figure of 60,000 tons deployed for monetary purposes, I'll be using 100,000 metric tons. I added the 40,000 because the resultant price leap will call forth lots of gold. People who complain about the gold standard being beholden to the mining industry always forget that jewelry-conversion demand is far more responsive. We've seen that with the rise of the cash-for-gold companies.

100,000 metric tons is, according to this conversion calculator, precisely 3,215,074,636.189 troy ounces. Call it 3.215 billion ounces troy.

The M1 money supply for Euroland, according to this page, is 4,549.620 billion euros as of January of this year. Taking the exchange rate that prevailed as of the end of January gets 6,305.773 billion U.S.-dollar equivalent. Adding the M1 number from the U.S. figures for January, $1,676.3 billion, gets a total of $7982.1 billion in M1 to be covered.

7.9821 trillion U.S.-dollar equivalent divided by 3.215 billion ounces yields a figure of $2,482 per ounce. Call it $2,500.

I've lowballed the figure a little for a specific purpose. If gold is money, then currency is a money-substitute. Currency backed by gold can be seen as a claim check, but I'm going to compare it to a non-interest-bearing demand note. The issuing government has borrowed the noteholder's gold, at a 0% interest rate, in the form of a demand loan. This way of structuring it wouldn't be accurate under a custodial requirement, where the government certifies that the underlying gold is on deposit, but it is for the more recent gold-exchange standard. It might as well be used now, since we have no gold standard at all.

Using the above $2,500 figure, and gold's Friday closing price of $1,134.40, we get gold selling at 45.4% of its true money value. Hence, the discounting of the gold-becoming-money scenario is 45.4%. Right?

Not quite. Gold has other uses, and the resultant demand for them has nothing to do with its monetary status. I've read estimates of $800-$900 as fair value for gold ex-investment demand. It's true that some jewelry demand is disguised savings, but some investment demand is for reasons other than remonetization anticipation. Some is related to gold's merit as an alternate asset class, as a substitute for stocks; some of it seems rooted in cynical momentum plays.

In order to give jewelry holders their net due, I'm going to assume that gold would sell at $734.70 per ounce if all monetary-related demand vanished and everything else remained the same. The only people wanting it, other than for use, would be people who value gold for its own sake. We all know there's an enduring demand for gold as jewelry.

$1,134.70 - $734.70 = $400. Based upon my guesstimate-driven calculations, there's $400 worth of remonetization anticipation in gold.

The $2,500 figure does not include that pre-existing demand. At today's price level and supply-demand configuration, my computation-easing guesswork yielded $734.70 for existing non-monetary demand. If the price goes up, demand would decline and new supply would be called forth. Had demand for other reasons been added in, not including speculative anticipation of other countries joining the gold standard, we'd get a target of about $3,000 if $500 is used for the demand-for-other-reasons figure. I know I'm guessing, but that component would be lower due to the higher price. Note, though, that using the $2,500 figure makes it vanish; non-monetary components are zeroed out. Thus, the $2,500 figure serves to isolate the remonetization amount.

The real handicapping figure, using the above assumptions, is $400/$2500, = 16%. Sorry to put it this way, but that percentage for a demand note is characterisitic of a borrower that's very unlikely to pay its obligations in full. NYSE-listed debentures of General Motors were trading at about that discount at the time when its was expected that General Motors would be bailed out.

By lowballing the remonetization target, I was actually being generous. Using $5000/oz, slightly below the figures in that article excerpt above, we get $400/$5000 = 8%. That's about the percentage-to-face that GM debentures were selling for just before the government takeover.

Since gold backing is a government obligation, the current discount level - even under guesses that are generous to the case - results in a discount to face not far from the discount on bonds issued by a recently-deposed government. The market has spoken: the chances of remonetization aren't good.


If gold is going to be remonetized, there's only one practical way to do it: from the bottom up. Gold won't be money again until it's used as money in everyday life. When I can walk into a computer shop with two one-ounce Maple Leaf coins and walk out with a top-of-the-line desktop. When I can fill up a shopping cart full of food and use a 1/10 oz. gold coin for payment. When a one-gram bar of gold can get mostly fill a gas tank. When bartering with gold becomes widespread and even normal. When gold becomes a real, if de facto, medium of exchange.

The handicapping calculation suggests that waiting for the top-down approach is almost futile. So does political common sense, by the way: fundamental changes of that sort are not enacted unless doing so would recognize a fait accompli. People using gold as a medium of exchange, entirely on their own initiative, make for that kind of fait accompli. No government repeals laws unless they're not only widely-hated but also unenforceable. No government, except for one headed up by the stupid, would ever enact a law that would foreseeably need to be repealed for those reasons.

The political calculus for gold remonetization is similar. No government would do so unless the gold-standard-phobes were marginalized and gold were already a de facto money.