Investing in gold, gold bars, gold bullion and gold coins (Photo credit: Investing in Gold)
My mom – who is going on 95 years old – grew up on a farm in rural California. Her home did not have electricity and she studied by kerosene lantern. An uncle who lived in the city came for a visit and gave my mom and her two siblings a rectangular piece of paper measuring about 3 inches by 6 inches. It had pretty pictures printed on each side. Based on his demeanor, she could tell that her uncle thought it was a special gift and expected some level of reaction from her, her sister, and her brother. But, there was none. They held in their hands a novelty and they were more filled with curiosity than excitement. My mom, her sister, and her brother asked, “What is it?” Their uncle replied, “Why, that’s a dollar bill. That’s money.” The kids began to laugh, “Who are you trying to kid? That’s not money. Real money is made out of gold and silver.” When my mom told me that story, it reminded me of one particular scene in the movie “Old Yeller.”
It so happened that paper money was a rarity in the rural parts of California – and perhaps many other locales – during the early 1920s and prior. But, on a technical level, my mom and her siblings were correct. “Real money” is in fact made of gold or silver or some other commonly accepted store of value . . . not paper.
Some believe that the paper money printed by a government should be backed by real money. At a time, one could exchange one’s paper money for real money, whether gold or silver. Then, the United States government ceased exchanging paper money for gold and silver and instead issued gold certificates and silver certificates. In essence, although you can’t get gold or silver for your paper money, you can sleep well knowing that your paper money is backed by gold and silver that the United States government is holding. Then that stopped.
Recently, there has been quite a bit of volatility in the dollar price of gold. It certainly can’t be that the fundamental value of the United States dollar is experiencing wide swings. We don’t see the dollar price of bacon or bread or a car wildly gyrating. But, given that gold is money, in a sort of cross-currency context, the prices of bacon, bread, and a car ARE wildly gyrating . . . relative to gold. Of course, history would suggest to us that the price of bacon, bread, a car, gold or most anything should be stable relative to each other over the long run. So, it would seem that the recent price swings in gold are driven by speculation as opposed to fundamentals.
So, what should the price of gold be in dollar terms? In prior articles, we’ve discussed this in terms of expansion of the money supply relative to the expansion of gross domestic product. That analysis suggested the price of gold should be somewhere around $1600 to $1800 per ounce. However, if we expect each dollar in the money supply to be backed by the gold stock of the United States government, as some believe, we are in for a big surprise.
According to a report released by the Federal Reserve last week, the M2 money supply is about $10.5 trillion. The amount of gold held by the United States government is approximately 260 million ounces. Doing the math, that translates to north of $40,000 per ounce. This is too difficult to even comprehend. But, whatever the real number might be, it seems that it is above the current $1200 area that gold in currently trading. The SPDR Gold Trust (ticker symbol NYSE:GLD) is an exchange traded fund that holds gold; its shares are very liquid. We think gold will be moving up and we’ve positioned our clients accordingly.
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