In this article you’ll learn about the gold backing to debt ratio. And what the gold price would need to be at today to match two previous periods of debt reset…
How do you determine gold’s value? Or put another way what price should gold be at? In our view this is the wrong way round and the question should be how many ounces of gold should a given currency be valued at?
However, in the world we live in it is more common to think of a dollar price of gold, than an ounce weight in gold of the dollar.
This video care of Youtube channel maneco64 looks at valuing gold in terms of US debt. He looks back to the previous two episodes where there was a currency “reset” in 1934 and 1980. Arriving at a gold backing to debt ratio for each of those two periods.
He uses the US national debt during these times. Then he takes the US gold reserves and the current gold price to give a total value of gold reserves. Then the gold reserves are divided into the total debt to give a gold backing to debt ratio.
The formula is therefore US Debt / (US Gold Reserves x Gold Price).
Gold Backing to US Debt Ratio “Reset” in 1934
What was the gold backing to US debt in 1934?
US Gold reserves in 1934 were 202.5 million ounces.
US national debt was at $27 Billion.
The price of gold in 1934 had just been reset to $35 per ounce. So this came to $27 Billion worth of gold.
So in 1934 the value of the US gold was therefore 26% of the national debt.
Gold Backing to US Debt Ratio “Reset” in 1980
What was the percentage gold backing to US debt in 1980?
US National debt in 1980 was $877 billion.
The price of gold spiked to $887.50 per ounce.
While US gold reserves were pretty similar to today at 261.5 million ounces.
So in 1980 US gold holdings therefore amounted to 26.4% of US National debt. Remarkably similar to the percentage in 1934!
What Price Would Gold Need to Be Today to Match the 26% Gold Backing to Debt Ratio in 1934 and 1980?
US National debt is currently $27,143 billion (a.k.a. 21.1 trillion).
US Gold reserves are currently supposed to be 261.15 million ounces.
So to achieve a 26% gold backing of the US debt would require a book value of US gold reserves of just under $5.5 trillion.
Right now the book value is $353 billion using the current market gold price of $1350. So to reach a 26% gold backing, then the price of gold would need to increase 15.57 times. So this comes to a gold price of $21,022 per troy ounce.
Conclusion: To match the 1934 and 1980 “reset” prices and back US debt at 26%, gold would need to be priced at $21,022 per troy ounce
The video creator rightly points out that there is no guarantee such a reset will happen. But that this does show how undervalued gold is today.
You might also be interested in: When to Buy Gold or Silver: The Ultimate Guide
Here is the full video…