Friday, 18 July 2008

Estimate gold market @ $8355+! 2008-07-18

Friday 18th July 2008 5.37 p.m. Estimate gold market @ $8355+!

Jim Sinclair had a prediction in 1974 for a bull market high of $900 for gold on this basis, quoting from his website article on dated 2008-07-17:

"In 1974 I concluded gold would rise to $900. That number represented the price gold would have to be at, times the amount of gold published as held for the US Treasury to balance the value, at par, of US Treasury debt held internationally. This would be balancing the international balance sheet of the USA.
The trick is analyzing what the international debt of the US is, both directly and implied. The number in 1974 was $900. I will not tell you the number today. It is absolutely scary

It is not easy to find the correct figures to reconstruct Jim Sinclair's forecast from 1974.
However, here are some useful pages concerning US debt owned by foreign countries and US gold reserves:


US Treasury: Treasury International Capital System Cross-Border Portfolio Holdings of Securities

Foreign Portfolio Holdings of U.S. Securities as of 6/30/2007 (klarge file (Use Right click Save Target As)

2008 Press Release revision of above:

Historic foreign debt & equity holdings 1974-2008

The United States Bullion Depository Fort Knox, Kentucky
Highest gold holdings 'this' (20th) century: 649.6 million ounces (December 31, 1941).
Amount of 'present' gold holdings: 147.3 million ounces. (Not sure of date. This is less than the total offical US gold reserves, see below.)
It also says, "The Depository is a classified facility. No visitors are permitted, and no exceptions are made."

Wikipedia (very useful and easy to see as usual!):-
World official gold holding (June 2008) - original source World Gold Council:
World 29,813.1 tonnes
United States 8,133.5 tonnes ... (261.49 M oz)
Venezuela 356.8
United Kingdom 310.3 (less than Venezuela, thanks to dickhead Gordon Brown)...
(Although the United States has the largest reserves of individual countries, in total the eurozone gold holdings are greater (11,065 tonnes as of December 2007).)

Central Bank Gold Reserves An historical perspective since 1845 by Timothy Green
This gives US gold reserves in USA as 8584 in 1974 and 8544 in 1975 (tonnes of gold).

World Gold Council latest information on gold holdings: (requires username and password)

Historical gold prices (see yearly charts and data):

Get your pocket calculators out!

Some of these US Treasury statistics seem to specify market value rather than 'par' value. Also, some include long and short term debt, some separate them. It doesn't really specify whether these are 'official' government holdings or if they include private institutional/investor holdings too. Some include other figures such as corporate debt and stocks and shares ('equities'), so the exact figures that Jim Sinclair would have used are not easy to find.

(1 tonne = 1 million grams. Need to x1,000,000/31.104 to get troy ounces: that factor is about 32150 ounces per tonne.)

Try for 1974:
Total foreign holdings of US Treasury debt (long+short term)= $42,427,000,000
US Treasury Gold holdings = 8584 tonnes
Gold price to balance debt = 42,427,000,000/8584/32150 = $153.73/oz
Unfortunately that is not Jim Sinclair's $900 prediction!
However, gold was quite close to this price in 1974! It topped at $195 and then declined to $103 before taking off again in the late '70s. Actually on the first trading day of 1975 (2 January), where Kitco's data begins, the London PM Fix gold price was $175.00. The Yearly average for 1974 was $159.26. how close is that? Within 5%! So it seems a very reasonable estimate. The debt had increased a lot by 1978 predicting a higher gold price as the 1970s went on. So let's continue on that basis... using data from these pages: and

Try for 1978:
Total foreign holdings of US debt (long term) = $42,427,000,000
US Treasury Gold holdings = 8584 tonnes
Gold price to balance debt = 50678000000/8597/32150 = $183.35/oz
Again, gold was quite close to this price in 1978! Actually this estimate is a bit low if anything. The 1978 range for gold was $160.90 to $242.75. Year average was $193.19/oz.

Try for 2008:
Total foreign holdings of US debt (long term)= $2,185,000,000,000
US Treasury Gold holdings = 8,133.5 tonnes
Gold price to balance debt = 2185000000000/8133.5/32150 = $8,355.84/oz.

I saw elsewhere an estimate of US short+long term Treasury debt held by foreigners as 1964928000000+229099000000=2194027000000 = S+L Treasuries = 2,194,027,000,000 2.194 trillion $, very close to the 2.185 Trillion that I used just above.

So this analysis gave a very reasonable estimate for the price of gold in 1974 and 1978 - and for 2008 gives a price necessary to balance the budget of the USA as being $8,355.84/oz!

Actually I think that this 2008 figure is not equivalent to the 1970s figures. The figures given on the Treasury website are at different levels of detail and are broken down in different ways, making it tricky to pick the right one. I need to look at the total long term debt figure in my calculation for 2008, which is actually $6.006853 Trillion.

Recalculate for 2008:
Total foreign holdings of US debt (long term)= $6,006,853,000,000
US Treasury Gold holdings = 8,133.5 tonnes
Gold price to balance debt = 6006853000000 /8133.5/32150 = $22,971.45/oz!

It seems that gold was already balancing this part of the debt of the USA by rising from $35 an ounce into the $150-200 region by 1974. I think that Jim Sinclair's calculation must be using a wider description of debt ("both direct and implied," as he says).

If you want to give yourself a fit, you could try using the total foreign holdings equity+debt, which at the present time are $9.771725 trillion as of the Treasury 2008 Press Release linked above. (Possibly that's closer in principle to what Jim Sinclair meant in 1974 to get his $900 estimate.) :
9,771,725,000,000/8133.5/32150 = $37,368.87/oz. That's an 'outrageous' price! Or maybe we should say that the today's actual $959.75/oz London PM fix is an outrageously low price?

Now, another date for which data is found: 1984. I cannot find actual Treasury debt data for 1980.
Try for 1984:
Total foreign holdings of US debt (long term)= $163,228,000,000
US Treasury Gold holdings = 8174 tonnes
Gold price to balance debt = 163,228,000,000/8174/32150=621.12/oz
Again, debt was up a long way by 1984. Average gold price was $360.48/oz, so maybe a bit undervalued. The estimate is in fact very close to the average gold price in 1980 which was $612.56/oz. Fascinating!

Let's summarise, including the adjustment factor that might be needed to bring the actual price to meet the estimate. Note how close the 1974 and 1978 estimates are, using this data!

Year, Estimate, Actual, Adjustment implied
1974, $153.73, $159.26 (annual average), x0.96
1978, $183.35, $193.19 (annual average), x0.95
1984, $621.12, $360.48 (annual average), x1.72
2008, $8355.84, $959.75 (17 July 2008), x8.71
2008, $22971.45, $959.75 (17 July 2008), x23.9

Since the 1970s figures using this model were both very close to the actual gold prices, these figures seem to imply more of a longer term 'fair value' for gold, rather than the price at a spike top such as the one in 1980.

PS. I have found another webpage that might explain Jim Sinclair's 1974 $900 peak estimate! See next entry.

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