$8387.96 Gold & US Balance sheet #2! 2008-07-18

Friday 18th July 2008, 9:58 pm: $8387.96 Gold & Balance sheet of USA. Part 2.

This gets more fascinating. I have found another webpage, this time on the St. Louis Fed website, giving foreign holdings of US debt. It's called:
'Federal Debt Held by Foreign & International Investors'
here:
http://research.stlouisfed.org/fred2/data/FDHBFIN.txt

The data gives the total foreign owned Federal debt calculated every 3 months since 31 March 1970 and doesn't quite tie in with all the data I had on the previous blog entry.

The US Gold Reserves figures are taken from this document in the public domain:
www.gold.org/assets/file/pub_archive/pdf/Rs23.pdf.

Again, I am going to do the calculations the same way but this time assuming that the debt data is consistent because it is all from the same page linked above:

Calculations: (1 tonne = 1 million grams. Need to x1,000,000/31.104 to get troy ounces: that factor is about 32150 troy ounces per tonne.)
Total debt / US gold reserves (tonnes) / 32150 = price of gold 'needed' to balance the debt using the gold reserves as collateral, as per Jim Sinclair's idea on http://www.jsmineset.com/ :-

1970:
Total foreign holdings of Federal debt = $12,400,000,000
US Treasury Gold holdings = 9839 tonnes
Gold price to balance debt = 12,400,000,000/9839/32150 = $39.20/oz.
Actual average price for 1970 was $35.94, so VERY CLOSE TO FAIR VALUE.
This was before Nixon closed the gold window and 'floated' / 'sank' the US$.

1971:
Debt ballooned!
Total foreign holdings of Federal debt = $31,800,000,000
US Treasury Gold holdings = 9070 tonnes
Gold price to balance debt = 31,800,000,000/9070/32150 = $109.05/oz.
Actual average price for 1971 was $40.80, so way undervalued (by 62%).
Debt figure is for 30 June 1971. Nixon closed the gold window soon afterwards.
No wonder! The dollar needed to fall and the gold was disappearing with 769 tonnes lost in 1971.

1974:
Total foreign holdings of Federal debt = $56,800,000,000
US Treasury Gold holdings = 8584 tonnes
Gold price to balance debt = 56,800,000,000/8584/32150 = $205.81/oz.
Actual average price for 1974 was $159.26, so slightly undervalued.

1978:
Total foreign holdings of Federal debt= $119,500,000,000
US Treasury Gold holdings = 8584 tonnesGold price to balance debt = 119,500,000,000/8597/32150 = $432.35/oz
Actual average price for 1978 was $193.19, so 55% undervalued.

1980:
Total foreign holdings of Federal debt= $118,200,000,000 (down on 1978 - thanks Mr. Volcker!)
US Treasury Gold holdings = 8221 tonnes
Gold price to balance debt = 118,200,000,000/8221/32150 = $447.20/oz
Actual average price for 1980 was $612.56, so 37% overvalued (and 98% overvalued at the 1980 futures top of $887.50 by this method).

1984:
Total foreign holdings of Federal debt= $171,600,000,000
US Treasury Gold holdings = 8174 tonnes
Gold price to balance debt = 171,600,000,000/8174/32150 = $652.97/oz
Actual average price for 1984 was $360.48, so 44.8% undervalued.
Note that the calculation is getting close to the 1980 highs.
...

2007/08:
Total foreign holdings of Federal debt= $2,193,400,000,000 (massive)
US Treasury Gold holdings = 8,133.5 tonnes
Gold price to balance debt = 2,193,400,000,000/8,133.5/32150 = $8387.96/oz
Actual price for 18 July 2008 is $948.80 after being beaten down a bit, so 11.3% of fair budget balancing value, i.e. 88.7% undervalued.

So this set of data agrees with the previous set, on a fair value of $8000+ per ounce for gold.

You can see also that at some point gold was overvalued (by a factor of 2 in January 1980), and was close to fair value in 1970, which gives this analysis some credence I think.

One might even say that gold was actually undervalued in the period around 1970, because the French were in a hurry to swap their trade surplus $ for gold at that time!

By this analysis, fair budget balancing value of $8000 is implied.