Gold-Backed Dollar Puts ‘Fair Value’ at $10,000 an Ounce: Chart of the Day (By Dylan Grice)

By David Wilson

Gold has the potential to jump more than fivefold as the precious metal’s price catches up with the surging amount of money in the U.S. economy, according to Dylan Grice, a global strategist at Societe Generale SA.

The CHART OF THE DAY shows the price at which each U.S. dollarin the monetary base, compiled by the Federal Reserve, would have been backed by an ounce of gold for the past half century. International Monetary Fund data on the country’s gold reserves were used in the calculation.

Grice, based in London, identified this price as the metal’s “fair value” yesterday in a report. Since June, it has exceeded $10,000 an ounce, as depicted in the chart’s top panel. Gold for immediate delivery closed at $1,819.63 an ounce on the spot market yesterday.

The bottom panel tracks the value of U.S. gold holdings, based on the spot price, as a percentage of the monetary base for the 50-year period. August’s proportion was 18 percent of the $2.66 trillion in the economy. The latter figure was more than triple the amount three years earlier, reflecting efforts by the Fed to spur economic growth.

“There is a demand for an honest currency,” Grice wrote. “The last time honesty was perceived to be so scarce -- in the 1970s gold mania -- the dollar was over-backed by gold. If it happened then, why not again?”

U.S. gold holdings peaked at 131 percent of the monetary base in January 1980, when spot gold climbed to $850 an ounce after a more than 14-fold advance in the preceding decade. The high equals about $2,330 an ounce in today’s dollars, according to a Labor Department calculator.