How Much Is Gold Worth? (Revised and Updated)

Everyone has an opinion as to what something is worth, whether the object of consideration is their home, a late grandfather’s pocket watch, or a specific stock.

The price of a specific item or asset at any given time is a reflection of all those varying opinions.

Some are based on fundamentals, some are based on technical factors. But the combination of all the opinions, and the resulting expectations (some expect the price to go up, others expect it to go down or remain the same), plus all of the other known factors at the time that might possibly impact the price, provide us with the clearest possible indication of current value for the item in question: its market price.

WHAT ABOUT GOLD?

If we believe that gold is money, we might have a different opinion or expectation than someone who sees gold as an investment; or someone else who deems gold to have no useful value.

If we don’t believe that gold is money, then we are saying that something else is.  That something else, practically speaking, is fiat, paper currency issued by a government or central bank (dollars, euros, yen, etc.).

With that in mind, let’s rephrase our original question: “How much is money worth?”

In the simplest of terms, money is worth  whatever it can be exchanged for.  This means that the value of money is in its purchasing power.

With that fundamental understood, the logic leads to a clean and simple statement: Gold, or any other money, is worth what we can buy with it. 

So, what can we buy with it?  And how do we know that our gold/money is realistically priced?

With gold currently priced at $1750 oz., the value of gold today is what we can buy with seventeen hundred fifty dollars.

But, is $1750 oz. an accurate reflection of gold’s purchasing power?  Are there reasons why we might expect that price to rise or decline to any substantial degree that would influence our choice to hold money in gold vs. US dollars?

Let’s go back to a time when the US dollar and gold were both money and equal in value (i.e., purchasing power).

SOME GOLD PRICE HISTORY

In 1913, both gold and US dollars were legal tender, and interchangeable. Either was convertible into the other at a fixed price.  A one ounce (.9675 ounces) gold coin was equal to twenty US dollars and vice-versa.  (note: the official gold price was $20.67 per ounce, which multiplied by .9675 ounce of gold in a gold coin equals $20.00).

On the surface, it would seem that one ounce of gold over the past century has increased in value by eighty-four hundred percent ($20.67 in 1913 vs $1750 today).  If that is true, we should be able to buy eighty-five times as much with one ounce of gold today as we could in 1913. However, that is not the case.

We said earlier that the value of money is what we can buy with it, or what we can acquire in exchange for it. What should be obvious by now is that even though the price of gold increased by eighty-four hundred percent, we don’t know whether there was an increase in actual value or possibly a decrease in value if gold was unable to maintain its original purchasing power.

We can however, draw some conclusions about relative performance.  The specifics are that gold gained in price by eighty-four hundred percent relative to the US dollar’s loss in value/purchasing power of almost ninety-nine percent. (see A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)

Gold has maintained its value, and increased its purchasing power in absolute terms, over the century-long period under consideration.

What we don’t know is the extent to which the current price of $1750 oz. reflects accurately the loss in US dollar purchasing power. How much value has the US dollar lost since 1913? Is it ninety-eight percent, or less; ninety-nine percent, or more?

The current market price for gold of $1750 oz. indicates a fairly specific loss of 98.8 percent in US dollar purchasing power.  A full ninety-nine percent decline translates to a one hundred-fold increase in gold’s price, or $2060 oz.

In August 2020 gold traded at $2057 oz., which indicates a loss in purchasing power in the US dollar of ninety-nine percent since 1913.

As recently as January 2016, gold traded as low as $1040.00 per ounce.  That price indicates a decline in US dollar value closer to ninety-eight percent.  In fact, it is nearly exactly equivalent to that mark.  A ninety-eight percent decline in US dollar value equates to a fifty-fold increase in the gold price since 1913 (100 percent minus 98 percent = 2 percent;  100 percent divided by 2 percent = 50; $20.67 per ounce times 50 = $1033.50 per ounce)..

CONCLUSIONS

Gold, in US dollars, is worth somewhere between $1000.00 and $2000 oz. That may seem like a broad range for price-conscious investors, but it is consistent with gold’s price action historically.

The current price of gold at $1750 oz. reflects a specific loss of 98.8 percent in US dollar purchasing power.

The US dollar is the only barometer you need to watch.  The elements of surprise and timing are critical.  Most especially so, if you are short-term oriented in your thinking.

Items for consideration that could have a substantial impact on the US dollar include  1) new and unexpected actions by the Federal Reserve;  2) accelerated or delayed effects of inflation previously created by the Fed; 3) complete repudiation of the US dollar; 4) a credit implosion; 5) Fed’s reaction to a credit implosion.

Some of the listed items, or variations of them, can affect the value of the U.S. dollar positively, too; which is why you need to keep your eye on the dollar, and not the specific event.

(also see The Gold Price And Inflation and Effect Of Deflation On The Gold Price)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!