In this article you’ll learn about the gold backing to debt ratio. Along with what the gold price would need to be at today to match two previous periods of debt reset…
Table of Contents
- Gold Backing to US Debt Ratio “Reset” in 1934
- Gold Backing to US Debt Ratio “Reset” in 1980
- What Price Would Gold Need to Have Reached in 2020 to Match the 26% Gold Backing to Debt Ratio in 1934 and 1980?
- What Price Would Gold Need to Be Today to Match the 26% Gold Backing to Debt Ratio in 1934 and 1980?
- Video: A Reset Like in 1934 and 1980 Would Mean $21,000 Gold
Estimated reading time: 7 minutes
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, rather than a weight in ounces of gold for the dollar.
An excellent 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.
In 1934 the gold price was reset by US President Roosevelt in the Gold Reserve Act from $20.67 per troy ounce to $35.
While in 1980 there was a reset by the market where the gold price was pushed all the way up to $887.50.
Then arrives 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. Finally, 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
So what was the gold backing to US debt in 1934?
US Gold reserves in 1934 were 202.5 million ounces.
While US national debt was at $27 billion in 1934.
The price of gold in 1934 had just been reset to $35 per ounce. So this came to $7 billion worth of gold (202.5 million ounces x $35).
Therefore in 1934 the value of the US gold was 26% of the national debt ($7 billion / $27 billion).
Gold Backing to US Debt Ratio “Reset” in 1980
Now, what was the percentage gold backing to US debt in 1980?
US National debt in 1980 was $877 billion.
While the price of gold spiked to $887.50 per ounce.
US gold reserves were pretty similar to today at 261.5 million ounces.
Here’s the calculation: 261.5 million ounces x $887.50 per oz = $232 billion / $877 billion national debt = 26.4%.
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 Have Reached in 2020 to Match the 26% Gold Backing to Debt Ratio in 1934 and 1980?
In 2018 when this video was created, US National debt was $27,143 billion (i.e. $21.1 trillion).
When we previously updated this article in May 2020, US National debt was then $24,947 billion (i.e. $24.9 trillion).
US Gold reserves were still reported to be 261.15 million ounces.
So in 2020 to achieve a 26% gold backing of the US debt, required a book value of US gold reserves of just under $6.5 trillion.
In May 2020 the book value was $445 billion using the market gold price of $1706. So to reach a 26% gold backing, the price of gold needed to increase 14.61 times. This came to a gold price of $24,925 per troy ounce.[Note: This is a hefty increase from the $21,022 value that the author of the video arrived at only 2 years previously back in 2018.]
What Price Would Gold Need to Be Today to Match the 26% Gold Backing to Debt Ratio in 1934 and 1980?
We are now just 3.5 years on from May 2020. But as a result of the COVID-19 stimulus measures, increased government spending, and higher interest rates, US national debt has ballooned by 35% to a massive $33,723 billion (i.e. $33.7 trillion).
So how has this significant jump in US national debt affected the gold price required to achieve a 26% gold backing?
US Gold reserves are still reported to be 261.15 million ounces.
So today in 2023 to achieve a 26% gold backing of the US debt requires a book value of US gold reserves of $8.76 trillion. (i.e. 26% x $33.7 trillion).
Today the book value of the US gold reserves is $508 billion – using today’s gold price of $1946 multiplied by 261.15 million ounces.
Therefore to reach a 26% gold backing, the price of gold would need to increase 17.31 times. ($8.76 trillion or $8,760 billion divided by $506 billion = 17.31).
That is a gold price of $33,690 per troy ounce.
Conclusion: To match the 1934 and 1980 “reset” prices and back US debt by the same percentage of 26%, gold would need to be priced at just under US$33,700 per troy ounce!
So from $21,000 in 2018, to $25,000 in 2020 and now to $33,700 in 2023! We can see how the ballooning debt levels are having on impact on the projected gold price.
The video creator rightly points out that there is no guarantee such a reset will happen. But nevertheless this does show how undervalued gold is today. And there is an historical precedent for this.
Interestingly this is a very similar number to that reached in this earlier article. Where we calculated the level the gold price would need to reach to 100% back the total assets of the Federal Reserve balance sheet: How Do You Value Gold | What Price Could Gold Reach? Updated 2023. This came to just under $32,000.
Here is the full video…
Video: A Reset Like in 1934 and 1980 Would Mean $21,000 Gold
You might also be interested in: When to Buy Gold or Silver: The Ultimate Guide
Editors note: This article was originally posted 26 April 2018. Last updated 14 November 2023 with new debt figures and resulting gold price projection.