“Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money.”
A former US Secretary of State under three Presidents, Daniel Webster was generally regarded as having made “the most eloquent speech ever delivered in Congress.” As a director of the Boston branch of the Second Bank of the United States, he also knew the value of fiat money. After his death he was pilloried by historian, Henry Lodge, for the perpetual debt against which he employed “checks or notes for several thousand dollars in token of admiration” from his friends. Ironic perhaps that 160 years after his death, a personal lifestyle appears to be becoming a public policy.
Long-term gold price US$1,676/oz; short-term upside
In this report, Edison has developed the theory that it first propounded in April 2009 to predict the long-term price of gold with respect to the total US monetary base. With QE3 underway, we now estimate that the long-term price of gold should be US$1,676/oz, with the potential to reach US$2,649/oz in the short term. Finally, we observe that the gold price would have to rise to US$9,904/oz if America’s official stock of gold were required to give full backing to its US$2.6trn total monetary base (something it did as recently as 1980) and that it would have to rise to US$16,942/oz if it were required to cover the US’s net external deficit (excluding gold) of US$4.4trn – something that could become more relevant with the change of leadership in China this month.
Average value of gold in the ground: US$108/oz
In addition to its value out of the ground, Edison has also calculated an average value of gold in the ground of US$108/oz (vs US$159/oz in January 2010). However, there have been large changes since our last report. The values of Canadian, Australian and London-listed ‘inferred’ ounces have all fallen by more than 90%, for example. There are also large disparities depending on the ownership of an ounce of gold. Where we find that, on average, a ‘measured’ ounce is worth US$488/oz to a producer, for example, it is worth US$98/oz to an explorer. In this report, not only do we detail the different values for ounces by ownership, function and listing, but we also quantify the correct discount rates to be applied to companies at different stages of development, as well as valuing a notional company and demonstrating the limitations of the capital asset pricing model (CAPM), as conventionally applied, to developing gold producers.
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