Bill Holter ~
I have long spoken about a coming "re set" of asset prices and I got to thinking, how much gold or at what price would be necessary under a scenario like this. Let's take a look at this first from the viewpoint of the Chinese. They "officially" claim to have just over 1,000 tons of gold which is hogwash. First, this number is over 3 years old and we know that they have produced a minimum of another 1,000 tons over that time PLUS they have imported at least 3,000 more tons in those 3+ years. This gives us a crude figure of at least 5,000 tons of gold held by the Chinese. They also have some $3.5 trillion worth of treasuries and dollar reserves.
If we do a little bit of math we can come up with a very crude number that would make the Chinese whole in the event of dollar devaluation. Assuming 5,000 tons held at today's gold price, we come up with a rounded number of $200 billion worth of gold. Were the dollar to drop 50% in "reserve value" the Chinese would lose some $1.75 trillion, if this loss were to be made up by an increase in gold value then a markup of 900% would do the trick. Let's round it off and say that an $11,000 per ounce gold price would just about cover a 50% markdown of their dollar holdings. Before you e-mail to tell me that the Chinese have already (contracted to) spent much of these reserves and purchased hard assets and their producers, I get it, this is just a mathematical exercise.
Now, let's look at this from the standpoint of the U.S. Assuming that the U.S. does have 8,400 tons (possibly a very bad assumption) of gold then we can arrive at somewhere near $350 billion worth currently. Were the decision to be made (internally, externally or by the market) to mark gold up high enough to cover all of the funded and "on the books" debt ($17 trillion) then we arrive at a figure just over $60,000 per ounce. Is this the equation that Jim Sinclair might have used to come up with his figure of $50,000 per ounce? My guess is that yes it is.
OK, so those were two very crude exercises of math that come up with 2 much higher numbers for the dollar price of gold and they were very far apart in terms of dollars. It would be easy to say, "OK, both of these numbers are far higher than where gold is trading today so just buy it and sit back." Actually if you don't read any further it would be OK because yes, if gold is going to be remonetized and become foundational reserves (the BIS says this is so) then the dollar price must go much MUCH higher.
But, we are talking about a "dollar" price of gold which means this exercise should be done more from a U.S. centric standpoint. We have a few little problems that may need clearing up before we can settle for any price let alone $50,000 per ounce for a number. First, our debt is not $17 trillion, it is higher. You must add in debt guaranteed from GNMA, FNMA and the home loan banks of a few trillion dollars. You must also add in other guarantees and programs with promises to pay. (Before I go any further, maybe you hadn't heard that just last week "we" guaranteed a $1.25 billion bond issue by Jordan of all countries!). Pick a number, I have seen credible numbers of as high as $200 trillion that the U.S. has with current and future obligations, is the real number $85 trillion? $100 trillion? Or is this a number of $200 trillion that we have been hearing about from the likes of Paul Craig Roberts. Would you like the real answer? "It really doesn't matter anymore," THAT's the real answer!
Another little problem in arriving at a U.S. dollar price of gold to cover "all" debt issued is "how much gold do we really have?" This is a question that does have an answer but not one that we will ever be told. We have not audited our gold reserves since 1956; we also know that gold has in fact been "leased" out. We also know that more gold has hit the market (based on known demand grossly exceeding supply for at least 15 years) than has been produced so it had to come from somewhere. Did any of this "extra" gold come from Ft. Knox or West Point? Do we really have the amount of gold that we claim that we do? Why should we "take for granted" that some 8,400 tons of gold are held? The Germans believed we were holding their gold and look what it got them; they now will have to wait 7+ years to receive a measly 300 tons because this was apparently "special and extra heavy gold." Seriously, why should we take this number for granted? Heck, I was dumb enough to believe that I could keep my health insurance, I'm not falling for the "it's all there, trust us" trick!
I have written several times on this subject of "What price?" does gold need to be marked up to. I think the "number" is not really that important because whatever it is, it will be "high" and multiples in dollar price of what it is today. What IS important to understand is that a devalued dollar will leave "holes" all over the world in the balance sheets of banks, financial firms, individuals and even central banks. These "holes" will be everywhere...and deep...they will even multiply themselves as one "hole" and will create other holes. The best description that I can come up with is "deep, dark smoldering holes of nothingness and default." These balance sheet holes will need to be filled by something...somehow.
My guess for whatever its worth is that the dollar price of gold will raise enough to offset how deep and far ranging the "defaults" become to balance sheets. Whether just in the U.S or internationally I am not sure but pushed to guess, gold is international, the losses will be international and thus the price will need to rise "as high as the losses are deep."