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Gold Value Per Ounce - Challenges In Pricing The Precious Metal
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Gold Value Per Ounce  -  Challenges In Pricing the Precious Metal

The gold value per ounce (at least as measured by exchanges) is presently above $1400, but what is the gold value per ounce truly today? There is significant reason to believe that the gold value per ounce is not properly represented by the dollar cost as seen on exchanges. While it is certainly true that the only way to buy the precious metal is via the US dollar, it is the dollar's value which itself has become hard to price. It is for this reason it's probably a good idea to look at the yellow metal relative to other measures of wealth as well.

The Standard Pricing Model in US Dollars

There has been a significant amount of price increases in the commodities space, and all else equal one might reasonably conclude that metals, energy commodities, and food futures have all become more valuable over the last 24 months (give or take). Is that really the case though?

Seeing Things Through the Eyes of a Child Reveals Much

The facts might surprise you, but we'll try to look at it in a way that might make more sense. Consider the cost of a Happy Meal at McDonald's or a similar restaurant. Now consider the worth of that favorite kid's snack through the eyes of a child about to eat it. Has the worth of a Happy Meal changed in the eyes of a child from 2008 to 2011? I think most would agree under this peculiar methodology that a child in 2008 would feel exactly the same (excited) about a Happy Meal as they would today - and yet the price (in dollar terms) of a kid's meal has grown by approximately 8 percent (using the Big Mac index as a proxy - Source: The Economist) over that time period. So tell me - what changed? The meal or the dollar used to pay for it?

How Global Quantitative Easing Has Devalued Paper Money

The gold value per ounce has increased considerably more than the price of our hypothetical Happy Meal. In dollar terms it has nearly doubled (94% gain - source: Goldprice org) since 2007, but tell me this - has an ounce of gold changed in any MATERIAL way since 2007? Clearly the answer is no, it has not. An ounce of the little yellow metal is physically, materially, and industrially EXACTLY the same as it was in 2007, so why has the cost of acquiring it doubled? What this says unequivocally is that either the physical/demand supply of dollars has increased dramatically (M1 up 36% since 2007 - Source: Federal Reserve Bank of NY) which accounts for SOME of the gold value per ounce increase but not all. The remainder of the change would have to be explained by the present value of the expected change in the future money supply based on the debt obligations of the United States.

Making Money on the Projected Gold Value Per Ounce

Investors wanting to make money buying gold will need to have a good handle on the monetary economics - and be able to react to changes fiscal policy effecting it. On the other hand simple investors who knew how to buy gold coins have done well the last few years (in many cases without being concerned with fiscal policy). The gold value per ounce will remain elevated so long as quantative easing and deficit spending policies remain in place.


Street Talk

Gary2  

Great Article Steve,nice info there to. Gary

Reply
  about 9 years ago
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