What Gold Will Buy

 

The dollar price of gold will become infinite as government collapses and evaporates during the 2020s, just because, legal-tender laws being no longer enforceable, nobody will sell real stuff in exchange for paper. However, that doesn't tell us how much gold will buy how much real stuff.

For a very long time - 2,000 years at least - the purchasing power of gold has been amazingly steady. In Roman times one ounce of it would buy a nice custom suit, and one ounce of it will still buy a nice custom suit. Meantime most "stuff" has radically changed, so no comparison is possible on many other items - but it seems reasonable to say that gold generally holds its value more or less constant.

In the coming meltdown, however, an unique circumstance will arise; government has never before gone out of existence. It could be that this long-time constant value of gold will change for the first time ever, and I see one good reason why it will.

Suppose for simplicity government vanished tomorrow. There is close to $14T in circulation as a money supply to serve the US economy and there are 140,000 tons of gold above ground worldwide. Suppose America has 10% of it, or 14,000 tons, to make the math easy.

Then 14,000 tons would need to do the work of $14 trillion, as a money supply.

That's an equivalence of $1 billion per ton of gold, and since there are 31.1 grams per troy ounce, that's a purchasing power of $31,100 per ounce. One ounce of gold will buy then roughly what $31,100 will buy now. A new car, say, such as a Volvo XC-70. Or a couple of Kia Rios, his 'n hers. Or something like two dozen nice custom suits.

Thus, when government evaporates, a 2,000 year old precedent will dissolve. Those who have been so prudent as to accumulate, say, 100 ounces of gold hidden in safe places will, by the late 2020s, be about as wealthy then as someone today with over three million dollars to his name.

Jim Davies
March, 2011