I received an interesting piece of data this morning so I thought I would share it.  The spreadsheet ultimately compares government debt with the amount of reserves in gold we have in the U.S. Treasury.  The amount of gold owned by the treasury has remained constant for many years at 261,498,899.32 ounces.  The really interesting figure is how much the price of gold would have to be per ounce in order to monetize the debt. 

In 1980 the total amount of liquidity in the market was $1.4 trillion (that includes government debt, NYSE Market Cap, Corporate Bonds and M1) of that number the government debt total was roughly $80 billion.  The 1980 high close on the spot price of gold at the time was $825 per ounce.  If the government was to monetize the debt (pay it off) with gold in 1980 it would have only needed to do that at $297.90 per ounce.  So in terms of gold to debt ratios, spot gold was overvalued at the $825 closing high.

In 1989 the total amount of liquidity in the market was $3.12 trillion, of that number the government debt total was roughly $144 billion.  The spot price of gold at the time was $416 per ounce.  If the government was to monetize the debt with gold in 1989 it would have needed to do that at $553.35 per ounce.  So in terms of gold to debt ratios, spot gold was slightly undervalued.

In January 2010 the total amount of liquidity in the market is $25.8 trillion, of that number the government debt was roughly $12.4 trillion and rapidly growing.  The spot price of gold is currently $1,110 per ounce.  If the government was to monetize the debt with gold today, the spot price would need to be an amazing $47,239!

Since we know that wealth never disappears, it merely shifts location. And we also know that, so far in this trend that when investors have become nervous about cash they have shifted their wealth from cash, to stocks or bonds. When they get nervous about stocks they shift to bonds or cash. When they get nervous about bonds they shift to cash or stocks. Therefore, so far in this trend cycle, when investors get nervous they have been shifting from paper to paper. We also know historically, that ultimately this will change and the flight to safety will be to hard currency assets ie. Gold and Silver.

Number one, look at the amount of increased liquidity (money) in the market over the last 30 years, from $1.4 trillion to $25.8 trillion.  That is a lot of money. I am not suggesting that all of that wealth will shift this way since it is most likely that once the flight picks up enough steam, those currently liquid markets will most likely become illiquid. But if the 80/20 rule applies that would be $5.16 trillion shifting in the physical metal direction. Almost twice the entire market cap in 1989! And remember, we’ve not taken into account all of the markets, just those four. Number two look at how much the debt has increased, we are in deep trouble here with no signs of stopping.  Keep in mind that this number doesn’t include Social Security or Medicare which experts estimate to bring the debt to somewhere between $55 and $80 trillion and growing! And that debt must be addressed one way or another.  Lastly look at the fact that if the government was going to monetize the debt with gold they would likely need to confiscate bullion in order to have a more meaningful total number of ounces since the government holdings have never been audited and studies done by GATA suggest we actually hold far less than what we say we have.

Since all the gold that has ever been mined is only 161,000 tons and fits into two Olympic sized swimming pools. You can guess the impact on gold if this $5.16 trillion wall of wealth shifts into physical metals. And since the physical metal has already begun to become scarce on the markets as the 2nd tier wealth began to shift from paper gold (ETF’s and stocks) into the physical. This would likely send rare gold coins to new heights as money would flow into this asset class.