World Supply of U.S. Dollars vs Gold
What's ahead for the U.S. dollar? Can't all prices be figured as a product of supply and demand? The feds stopped reporting the growth in M3, the principal measure of the U.S. money supply, earlier this year. But Adrian Van Eck, who keeps track of these things, estimates that the world's supply of dollars has increased by $3 trillion over the last three years. That is an astounding figure. But dollars have become such an abstraction... such whiffs of smoke... we don't know what it means.
Let's compare the figure to the world's supply of gold. Gold stocks grow at about 1.7% annually. If the base of 155,000 tonnes above ground - the figure provided by the World Gold Council - is correct, that means we only have to do a little math to know where we are headed.
Let's see... there are 28.35 grams to the ounce... and 1,000 grams to a kilogram... and 1,000 kilograms to a metric tonne. If we're doing the figures right, we end up with an above-ground supply of more than 5 billion ounces... which, multiplied by 1.7% over three years... gives us an addition to the world's gold supply of about 25 million ounces over the last three years.
In other words, for every ounce of gold added to the world supply over the last three years, the United States has added $120,000. But wait, we are talking about the world's total supply of new gold. So, in addition to the new supply of dollars, we have to include the increases in the rest of the world's money supplies. We won't even try. Instead, we will guess that, altogether, the foreigners added about the same amount of new currency - about $3 trillion worth. Which gives us a total of about $240,000 for every ounce of gold added to the world supply.
What does this mean? We don't know, exactly. But our guess is that the incremental dollar could be worth less than people think... and the incremental ounce of gold a bit more.
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Charles M on 26 June 2007:
Regarding calculations concerning the worth of gold in dollars:
Why don't you divide the number of U.S. dollars in circulation (never published, perhaps not known) by the amount of gold in the U.S. Treasury? It is no less than $172,000/Toz, and probably much greater. In other words, gold may be a bargain if you're buying, but when will it appreciate to its true value? Put another way, people who print currencies don't like competing monetary systems, such as precious metals. So, the value of PM's is held artificially low.
To get some idea of the number of dollars in circulaltion, you'd need to integrate M3 from beginning to end. That would give an approximation of dollars created. Dollars can also be destroyed, but there is no measure for that figure. It is certainly less than dollars created.
To get some idea of the amount of gold in the U.S. Treasury, one needs to trust official records. Unfortunately, U.S. gold may have been leased or lent to other entities. We may not actually own any, or as much as we claim to possess.
It seems foolhardy that we trust our most important institutions to people that are so cavalier with our money.
Comment by Mike on 21 July 2007:
Looking at the initial calculation of grams to ounces, it would be more accurate to note that a troy ounce (used to weigh and trade precious metals) is comprised of 31.1 grams not 28.3 grams as in an avoirdupois ounce. This actually furthers the argument that gold is quite a bit more precious than the dollars that will soon be chasing it. Great insight....
Comment by Frank on 3 April 2009:
Just read an article (from august 2008) that the world counts about 10 million millionaires (in US dollar terms). That means that they own among them at least 10 trillion dollars. If they wanted to (let's say they start a club) buy all the gold in the world (155.000 tons, according to this article, which amounts to 4.65 trillion dollars (at 30.000 dollars per kilo, which is roughly 1000 per ounce), they would each have to pay roughly half a million dollars. Their club would then own all the gold in the world, and they would each still be a half-millionaire.