Thursday, October 7, 2010

Gold Accounting

During periods in history when governments move away from gold backed currencies gold will revalue itself in the open market.  Market forces will "re-price" gold to back the supply of currency available.  I like to think of this as an accounting or balance of payments.

This happened in the early 1930's, it happened in the late 1970's, and it is currently happening again today.  For a brief period in 1979 and early 1980, the price of gold was high enough to back every dollar that was printed by central banks.  (Gold rose from $35 an ounce to $850)

The chart below shows that mark being reached in 1980, and it shows where the gold price is today in relation to the new currency that has been created since that point.



As you can clearly see, gold has a long way to go before its price revalues to the level of paper money in existence.  This is before the Federal Reserve and other Central Banks begin their upcoming second round of quantitative easing. (money printing)

Prepare and anticipate massive pull backs along the way, but understand where we are in the big picture.

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