How High Is High?

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A simple rule of thumb to determine the paper price of an ounce of gold is to simply divide the M1 money supply by the gold supply, and magically, you determine the price of gold in dollars per ounce. In round numbers, M1 (St. Louis Fed) CURRENCY ONLY portion is 757 billion, and the official U.S. Gold reserve is (261.5 million troy ounces). This simple division problem gives $/oz of approximately $2900 per troy ounce.

...As I write this, my first column for The International Business Times, and place the precious metals into the context of their rightful place in the overall investment universe, it is quite easy for me to state that the precious metals are still in the undervalued stage.

For readers this might be a conundrum, because anyone interested in business and finance can easily recall recent headlines about gold hitting all-time highs. But, alas, anyone with even a minute amount of ability to think would ask the question, "What does all-time high mean?" Certainly, in U.S. "dollar" terms, the price of gold is higher than the price of $850 reached January 21, 1980.

As true as this statement remains, we all must realize that the amount of money in the M1 money supply (the quantity of currency and the value of checking accounts owned by the public) is at least 3 times (300%) greater now in 2008 than it was in 1980. So to put gold at a real, not nominal, all-time high, gold would need to be far higher...

A simple rule of thumb to determine the paper price of an ounce of gold is to simply divide the M1 money supply by the gold supply, and magically, you determine the price of gold in dollars per ounce. In round numbers, M1 (St. Louis Fed) CURRENCY ONLY portion is 757 billion, and the official U.S. Gold reserve is (261.5 million troy ounces). This simple division problem gives $/oz of approximately $2900 per troy ounce.

Does this mean gold is going to trade at $3000 per ounce at some point? No it does not, but at least this thought experiment provides a bit of logical thinking behind the question, "How high can the price of gold reach?"...

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