David Hargreaves on the price of gold

Let’s not speak of it dropping like a stone, but the gold price is coming off rapidly towards our $1200/oz resting place. Not yet at Goldman’s chosen $1050 nor remotely supporting Sprott at $1500 by Christmas. Meanwhile Goldcorp, the 4th largest producer, says it as a company can survive at $900 whilst warning that that would take a lot of production out of the market. Would anyone care?

Were this any other commodity, the answer would be ‘yes’. Oil is being supported, desperately, at $100/bbl by Saudi Arabia cutting back production, but that is an industrial commodity. Gold complimented only by gemstones, is not.

No more than 10% goes into fabrication where it is both recyclable and sustainable. Because of its unique chemical and physical properties and relative scarcity it dominates the fear factors, of war and financial upheaval. Thus its price is volatile. To the surprise of many, but not WIM, it is on the slide. What will save it? What is its base case?

A world economic recovery of sorts is building, which will require increased financial liquidity. How will you pay me?

Not readily acknowledged is that barter accounts for up to one-third of all trade. After that it is dollars, plain and simple.

Others nibble at the edges but the greenback still has it. We rely for this upon a prosperous USA. When it first gained ascendancy, the dollar was physically gold-backed. It you walked into a New York bank you could demand, in exchange for $35 in notes, an ounce of metal. That persisted from 1935, when the US fixed it, until 1970, when the cost of the Vietnam War put an end to it. At the same time, the other currencies of note had fixed exchange rates to the dollar. Could we go back to that and if so, what would the price of gold need to be? Few dare tread that ground but here goes.

1. The need for money is as a trading lubricant, whether you are selling goods or services.

2. A common currency is vital and its reference to a store of value, equally so. Once the gold datum vanished it was replaced by perceived worth, such as the economic status of the issuing country. This is why the dollar dances to the tune of its employment data.

3. A return to a gold standard might alter all that. Is it possible and what would the price have to be?

Let us look:

• World purchasing power, GDP, is estimated by Wikipedia to be, by 2015, $100 trillion (100×10¹²).
• All gold in the world is estimated at c. 150,000 tonnes.
• Now at $1200/oz (relax we will get there) that is c. $5.4 trillion.
• So to have gold backed currency, we should need 100 ÷ 5.4 x 1200 = $22,000 per ounce. But that is double counting, because for every buyer there is a seller, so money counts twice. Even so, gold would need to be above $10,000 per ounce to become monetised again. Cannot see it happening can you?

4. Now this brings official holdings into play. They rate no more than about 30,000 tonnes worldwide and are being added to but slowly. The rest is stored, for a rainy day, under bedsteads and around body parts or in coins. It would take a lot of prising out.

Conclusion? Gold will continue to register the fear factor, military, economic and political. Right now these are seen to be containable so we feel comfortable with our short term price prognosis. Yet before you tuck yourself smugly into bed tonight, whisper a little prayer: God Bless America.

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About David Hargreaves

David Hargreaves

David Hargreaves is a mining engineer with over forty years of senior experience in the industry. After qualifying in coal mining he worked in the iron ore mines of Quebec and Northwest Ontario before diversifying into other bulk minerals including bauxite. He was Head of Research for stockbrokers James Capel in London from 1974 to 1977 and voted Mining Analyst of the year on three successive occasions.

Since forming his own metals broking and research company in 1977, he has successfully promoted and been a director of several public companies. He currently writes “The Week in Mining”, an incisive review of world mining events, for stockbrokers WH Ireland. David’s research pays particular attention to steel via the iron ore and coal supply industries. He is a Chartered Mining Engineer, Fellow of the Geological Society and the Institute of Mining, Minerals and Materials, and a Member of the Royal Institution. His textbook, “The World Index of Resources and Population” accurately predicted the exponential rise in demand for steel industry products.