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Ready class? Here we go:Mark Cregan Just a quickie in the fun with numbers category. What prompted this was a series of posts on Gold Eagle and other forums about the ridiculous numbers for gold (and silver) being bandied about. Some of the authors were downright majorly upset by this, calling such speculation (which it is) harmful to the metal community or warning we won't like the world if such numbers are achieved (which, since I don't like the way things are, doesn't mean things can't get worse, but it is not my metal position that is making it worse). So, having recently read Mogambo over at the Daily Reckoning, I decided to share a little math exercise with you. In math, we start with some givens. In this case, just using gold in our math, let's assume the next year's new production comes in at a nice even 2500 metric tons. An optimistic forecast some would say, so feel free at home to change the number. The next given coming up, again for this exercise, is the new amount of debt (bonds) likely to be issued by just the US government over the next year. From Mr. Noland's and Mogambo's work and musings respectively, and a figure you can check in a year at the Treasury's Debt to the Penny website, the working figure selected amounts to US$1 trillion. Now suppose that all that new debt being issued, by just the USG, not the rest of the world who is also deficit spending to beat the band, but just the USG's debt, was backed by the new gold production. Let the current stockpile support the current debt, just put a stake in the ground for 1 year of new debt versus 1 year of metal production. What would be the price per ounce, in Federal Reserve Notes (FRNs)? Ready class? Here we go: 2500 metric tons times 32,150.7 Troy ounces per ton yields equals 80,376,750 Troy ounces. One trillion FRNs is 1,000,000,000,000. Oh boy, I see trouble ahead. To get the FRN to gold ounce ratio, divide the FRNs by the ounces. Result? 12,441 FRNs per Troy ounce of gold. Today the current FRN value per ounce of gold made it just above 400 FRNs per ounce. If the US was forced to share the yearly production of gold on a GDP basis, it could only claim one fourth of the current year's production. The FRN price would move up slightly to the 50,000 number. What the numbers would be in your neck of the planet depends on what your Central Bank is up to. And note that none of the above has been shared with all the other debt the system is creating. This is how a bellboy gets to buy a hotel with one coin. That he probably lost the hotel to the coming war was decidedly unfortunate. The reason precious metals are precious is because they are rare. Some of my capital is deployed with mining companies trying to increase the supply of that precious metal. So in effect, I'm trying to force down the conversion ratio by encouraging more production. I'm losing that battle. Mark Cregan Note: A kind pair of readers pointed out that I was mixing English tons in an earlier version of this essay. So to limit confusion, and since they are quite correct that the market talks in units of metric tons when describing production figures, I have modified the math accordingly. Both the production and debt assumptions will probably be lower and higher, respectively, than the givens in this exercise. We will know in a year, but I am not very optimistic on either. ___________ |
