As the price of gold rapidly approaches the once-unimaginable level of $5,000 per ounce, fixed income analysts at VanEck point out that if gold were required to back the money already in circulation, its true price would be orders of magnitude higher. They suggest that some of the world's most developed economies face the highest currency risk in such a scenario, while countries like Russia and Kazakhstan could easily adopt a gold standard tomorrow.
"What is gold's 'real' price?" asked VanEck's emerging markets debt team in a recent analysis. "Not the price you see on the screen today, but the price if gold were to become the global reserve standard once more." The analysis comes as central banks are purchasing gold at a record pace, and questions about how long the US dollar's dominance will last linger in the market.
Given gold's recent price surge, fueled by its reserve asset attributes, the analysts argue this question is long overdue.
The US dollar's share of global reserves is declining.
This situation, according to the analysts, raises a fundamental question: what would the price of gold be if it had to back the global money supply?
"For much of modern financial history, this was not a hypothetical question," they noted. "Under the classical gold standard, paper money was simply a claim check on physical gold held in a vault. This link was completely severed in 1971, and the world moved to a 'fiat' currency system, where money is backed only by government decree."
VanEck's analysts raise this question now not because they believe the gold standard will return tomorrow, but because it serves as what they call the ultimate solvency test. "By calculating the price gold would need to reach to back today's money supply, we can see how much paper money has been printed relative to the hard asset that once backed everything."
To find this implied "reserve price" for gold, they employed a relatively simple calculation: dividing monetary liabilities by known official gold reserves.
The analysts used two specific definitions of money in their calculation, noting that "the definition of 'money' expands during a crisis."
First, they calculated for M0, the monetary base. "This is cash in circulation plus bank reserves," they said. "In a classic bank run, this is the money people demand."
The second category is M2, or broad money. "This includes savings deposits and money market funds," the analysts wrote. "In a modern financial crisis, like 2008 or 2020, this is the broader liquidity the entire system tries to protect."
When they calculated the implied price of gold based on the monetary liabilities of the world's major central banks, the resulting valuations were staggering.
"If gold needed to back M0 (the monetary base), it would need to trade at $39,210 per ounce," the analysts stated. "If gold needed to back M2 (broad money), it would need to trade at $184,211 per ounce. These figures represent the price required to 'cover' the outstanding monetary liabilities in a scenario where gold once again becomes the primary reserve asset."
VanEck analysts caution that while these two numbers represent a global average, they do not reflect the vast disparities between nations. "The ratio of printed money to gold held reveals which countries are over-leveraged and which are safe," they said.
The most leveraged nations include some of the world's most developed economies, such as the United Kingdom and Japan, which have printed substantial amounts of money relative to their official gold holdings. "In a reset scenario, their currencies would be under the most pressure," they wrote. "For example, the implied gold price for Japan's M2 is around $301,000 per ounce, while for the UK it's about $428,000."
VanEck's baseline group includes the United States and the Eurozone. "The implied price for US M2 is around $85,000, while for the Eurozone it's about $53,000," the analysts pointed out.
A third group—the solvent nations—includes emerging economies that hold significant gold reserves relative to their M0 and M1 money supplies. "Emerging markets like Russia and Kazakhstan arguably have enough gold to back their money supply at a much lower valuation," they said. "This highlights a shift where some emerging markets are becoming more fiscally defensive than developed nations."
VanEck wrote that these calculations are far from academic in 2024, as the world has clearly entered an era of fiscal dominance.
"Developed markets are grappling with high government debt, forcing central banks to 'print' more money to keep the system liquid," they said. "As the pile of paper money tends towards infinity, the value of the finite asset, gold, must, in theory, rise to keep pace."
The emerging markets debt team cautiously notes that they do not expect the US dollar to "abruptly lose its reserve currency status." Instead, they foresee a gradual evolution "toward a multi-polar world where the dollar shares the role with gold and fiscally disciplined emerging market debt."
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