The value of gold and silver

2. Gold and silver have commercial and cultural value

The cultural value of gold and silver is really difficult to estimate because people with different cultures have different value standards. In addition, some items have added value beyond the materials. For example, a gold dish or chair used by a king or a hierarch, an amulet given by a relative, ancient silver coins and so on, all of them have added value and the value is hard to estimate. The commercial value of gold and silver is mainly decided by their supply and demand. It’s also hard to estimate the exact value. To make it easy, I will use statistical methods with historical data spanning 70 years to estimate the gold’s commercial and cultural value (GCCV) together in terms of monetary value.

Using the historic data of monetary base and gold reserve in the United States, we can calculate gold’s monetary value in USD during the last 70 years after Bretton Wood System (July, 1944). Then we divide gold price by monetary value to get a chart of the ratio of price to monetary value of gold (RPMV-Gold) in the United States over the last 70 years as in Figure 1.

From figure 1, we can see that RPMV-Gold reached 170% in 1980. Most people in North America and west Europe then expected gold would be money again soon. The 70% more above its monetary value was the maximum RPMV-Gold. We also see that RPMV-Gold reached the bottom around 10% three times in 1999, 2008 and 2013. Few people in the world these days think that gold will be money again thanks to the government education all over the world. Now we have a range of GCCV from 10% to 70% of gold’s monetary value. With the same principle, we can figure out the range of silver’s commercial and cultural value (SCCV), it was between 2% and 60% of silver’s monetary value during the last 70 years. The ratio of price to monetary value of silver (RPMV-Silver) will be much higher than 60% in the future because of the coming silver shortage.

3. The value of gold and silver and the future price trend

Now that we have the monetary value and the statistical range of commercial and cultural value of gold and silver, we can figure out the current value of gold and silver. For gold, it is between $13,022 / ounce and $22,137 / ounce (monetary value plus maximum GCCV). For silver, we use the GSPR of 12.5 and current value of gold to estimate the value, it’s between $1,041 / ounce and $1,770 / ounce. All these values are just for reference and must be adjusted dynamically according to the money supply and gold reserve data.

The future price trend of gold and silver will be a movement from the current price to their actual value. Comparing the current price and the value of gold and silver, we know that the future price trend of gold and silver will definitely go up. Therefore, we should purchase gold and silver at the current price. The current RPMV-Gold around 10% is the third opportunity that the market gave us in 70 years and generally we cannot expect to get the opportunity more than three times. The door may close quickly very soon.

Some may argue that gold and silver will not be money again and their prices will never match their values. The problem with those opinions is that those people forget how long gold and silver have been used as money and how long the average life cycle of the fiat currency is. History told us unlimited times: Any fiat currency will eventually become useless paper. No fiat currency has lasted forever. Figure 2 shows the value changes of a few currencies in terms of gold from 1900 to 2012 (World Gold Council). We can see the value trend for all those currencies is going to zero. No matter whether or not gold and silver will be money again, one thing is for sure: All fiat currencies will eventually fail, but gold and silver will hold purchasing power forever. From this point of view, any price is a good price to buy gold and silver. However, you must be aware that if you purchase gold and silver at a price higher than their value, such as the price in January 1980, you may have a risk temporarily. But you will be the winner eventually if you own real gold or silver instead of the fiat currency. Some people measure stuff such as commodities, houses, stock indexes and workforce costs in gold and silver instead of paper currencies. That is an alternative method to value gold and silver.

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