What might the price of gold have to be to return the United States to a more traditional and sustainable level of debt relative to gross domestic product?
GATA consultant Robert Lambourne attempted such a calculation the other day, and it shows how out of whack the gold price has become after decades of Western central bank gold price suppression policy.
Of course, as Lambourne notes, nothing in law or custom requires any particular ratio of the gold price and the value of national gold reserves to national government debt. But the U.S. government's debt has grown so explosively in recent years that even the new U.S. Treasury Secretary has spoken of the need to "monetize" national government assets to maintain the government's financial stability, and gold may be foremost among those assets.
So Lambourne provides the following calculations to estimate a new gold price.
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"Further to our recent continuing discussions about possible gold price resets initiated either by China or the U.S. government, I have set out below a relatively straightforward calculation of the implied gold price required to return the U.S. to a more typical post-World War II debt level.
"The metric used for this calculation is the ratio of non-financial debt to gross domestic product. This is a metric used by the International Monetary Fund and the Bank for International Settlements, and much data is available on it for many countries. This is not to claim that one ratio is all that needs to be considered, but just to provide a snapshot of where the United States and its debt levels stand today.
"The Federal Reserve publishes historical tables of the ratio of non-financial debt to gross domestic product, as well as the statistics used to calculate and analyze it, going back to 1952:
https://www.federalreserve.gov/releases/z1/dataviz/z1/nonfinancial_debt/table/
"The table shows that non-financial debt to GDP from 1952 to 1980 was always in the range of 120-140%. More recently, the ratio has risen substantially and in the most recent available quarter is 259.9%.
"The BIS data on international debt to GDP ratios quotes 249% for the U.S. So to keep the calculation easier, the rest of this note calculates an implied gold price simply by halving the approximate present level of non-financial debt to GDP from 250% to 125%
"From this link --
https://fred.stlouisfed.org/series/GDP/
-- the reported GDP is $29.7 trillion. So let's call it $30 trillion.
"Hence, the total U.S. non-financial debt is assumed to be $75,000,000,000,000, which is 250% of the GDP of $30,000,000,000,000.
"The target new total level for non-financial debt is half: $37,500,000,000,000.
"To achieve this new total level, the gold price reset for the U.S. federal government is calculated by dividing the reduction in debt by the number of troy ounces of gold held in the reported U.S. gold reserve.
"According to the US debt clock --
https://www.usdebtclock.org/gold-precious-metals.html
-- that figure is 286,906,640 troy ounces. This equates to a gold price of around $130,700."
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Of course, that figure of $130,700 seems extreme. And yet, gold price suppression is just the other side of the federal government's profligacy. Indeed, gold price suppression has long been the prerequisite for that profligacy. Otherwise, the devaluation of the U.S. dollar would have become so obvious that financing the government with treasury bonds might have become impossible at any bearable interest rate, and there would have been no concealing commodity price inflation.
Attempts by others to estimate a gold price in a financial world that has returned to normal ratios have reached $10,000 or more. This one appeared at the Kitco internet site just last week:
Indeed, the higher the official gold price and the official valuation of the Treasury Department gold certificate held by the Federal Reserve, the more money the Treasury Department can instruct the Fed to print to be used to increase federal government spending or to repay government debt. To a great extent, gold revaluation is another mechanism of money creation.
Gold prices at $10,000 or more might be shocking enough and capable of scaring capital away from the United States and its Treasury bonds insofar as it signified a devaluation of the currency. So the U.S. government might impose capital controls to lock money into the country, especially if China, needing to stop deflation in its economy, revalued gold upward, incentivizing gold exports to China from the United States. In that case, the U.S. government might even try to confiscate gold again.
Don't think such things are impossible. They are formally authorized by the Emergency Economic Powers Act of 1977 --
https://en.wikipedia.org/wiki/International_Emergency_Economic_Powers_Act
-- and in 2005, a Treasury Department official confirmed to GATA that upon proclamation of an emergency by the president, the department would be authorized to seize or freeze not just any gold- and silver-related assets but just about any financial asset:
https://www.gata.org/node/5606
So the times are turbulent and dangerous, and to survive financially, people may want to take precautions, even as nowhere may be entirely safe.
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