2020 Forecast Issue Revisited: Precious Metals Are in the Danger Zone

Au Report

Source: Michael Ballanger for Streetwise Reports 08/11/2020

Sector expert Michael Ballanger runs the numbers on current and future values of gold and silver given current economic conditions.

“I’d rather be a gold bug then a paper worm.” —Anonymous

In late 2019, as I was laying out the framework for the 2020 GGMA Forecast Issue, there was only one four-letter word that kept cropping up and that word was D-E-B-T (actually there were two, but one was what I mutter every time the auto spellcheck completes a word I do not intend to type).

Long before COVID-19 and government-imposed lockdowns cratered the global economy, I was formulating the future price of gold based upon the layers upon layers of sovereign, corporate and household debt sloshing around the world. I deduced that since faith in fiat currencies was rapidly evaporating, then the only remaining collateral left carrying the ability to underpin the gargantuan sovereign debt beast was gold.

In the 2020 GGMA Forecast Issue, I showed the world how, by using the United States as an example, one could actually put a U.S. dollar “fair value” on the price of gold by turning to the official stated reserves held by the world central banks (shown below) as measured against total national debt (which stood at approximately US$25 trillion in late 2019).

This calculation does not tackle the conspiratorial question of, “Is the gold really there?”, which dogs discussion groups constantly, citing multiple hypothecations of the U.S. reserve over the past five decades.

For purposes pertinent to this discussion, I assume that the U.S. owns the 8,134 metric tonnes of gold, which represents 17,927,336 pounds, or 286,837,376 ounces, of the shiny metal.

Fed Balance Sheet July 2020

Using pre-Repo and pre-COVID numbers for U.S. total national debt of US$25 trillion, that figure represents US$87,157. Using the same ratio of minimum debt to equity demanded by the mortgage industry of 10%, for U.S. debt to be properly collateralized, you would need a gold price of US$8,715.70 per ounce.

Now, here are a couple of items to consider:

1. Since Fed REPO operations commenced a tad over a year ago, the Fed balance sheet, which had “normalized” from US$4.5 trillion to US$3.8 trillion in 2018 and 2019 until the Powell REPO “pivot,” has exploded higher here in 2020 and stands at around $7 trillion, an 84% increase in one year.

2. Total U.S. debt, while impossible to get a reliable figure, has added a minimum of US$10 trillion and a maximum of US$20 trillion in that same one-year timeline, bringing us to an estimated US$35–45 trillion, thanks largely to the actions of both the U.S. Treasury and the Fed.

So, based on my formula of 10%, the new figure is found in a range between US$12,202 and US$15,688 per ounce. With gold at $2,048.90, it today trades between 13.06% and 16.8% of levels required to collateralize the total U.S. debt load at 10% equity. …read more

Source:: The Gold Report