As the Bank of England’s balance sheet tops £400bn here’s why gold is ‘cheaper’ today than when it was £13 in 1967
This week the BoE had the dubious honor of having its total balance sheet (as opposed to just the APF bit) roll over a staggering £400bn. £404.622bn to be precise:
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Which means that since the BoE aggressively started increasing the size of its balance sheet in 2008 it has increased by 330%.
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And what has gold done over this same period of time?
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It’s ‘only’ increased by 315%. Or in other words the money printing has outpaced the rise in the gold price over the past 4 years. Why is this important? The price of gold is really simply a function of the supply of money, when more bits of paper chase roughly the same amount of gold, then it will take more bits of paper (currency) to buy the same amount of a gold (or anything else for that matter).
Now there are many ways the money supply is calculated, but by far the best way to get a handle on the money supply is to look at the organsiation charged with creating it, the Bank of England, and we do that by looking at the size of its balance sheet.
There is also a much more special relationship between gold and the balance sheet at the BoE than anything else because historically gold has been used as money (the last time ended in the 1930s).
Here’s the BoE’s balance sheet going back to 1830:
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As you can see since from the early 1970s the balance sheet at the BoE has ballooned by 10,000%. Back in 1830 the balance sheet of the BoE was just £69m. Now obviously the value of £69m back in 1830 was a lot different to the value of £69m today, you could go back and use some CPI/RPI blend and try and create a balance sheet in today’s money, but because the CPI is such a poor indicator of price inflation there’s a much better way of creating the BoE’s balance sheet in today’s prices, ounces of gold.
Back in 1830 it took around 16.25m ounces to cover the BoE balance sheet. Today it takes 370m ounces of gold to cover the BoE’s balance sheet. And here is 182 years of the Bank of England’s balance sheet priced in ounces of gold:
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Fist up note how stable the BoE’s balance sheet was. Up until WW1 the average value of the Bank’s balance sheet was around 20m ounces and it hardly fluctuated at all.
We can see there was a big spike in the amount of ounces the balance sheet of the BoE was worth until 1967 before there was a big change. From the 1967 high to the 1980 low (but high in prices) the amount of ounces of gold that the BoE’s balance sheet was worth fell 85% from 318m ounces to just 46m ounces.
Now look where we are right now, today the value of the BoE’s balance sheet is 370m ounces. That’s MORE than in 1967 when the price of gold was just £13. So what happens if the BoE’s balance sheet returns to that 1980s low of 46m ounces, a fall of 90%? It would take a price rise GREATER than the price rise from 1967-1980 when gold went from £13 to £371 (the average price in 1980 was £264 – which is what we use in the chart above), crucially from these levels, around £1100.
Or to put it another way, with the price of gold at £1100 it could be argued it is CHEAPER today than when it was just £13 in 1967. Which would mean a price run from £1100 today all the way to £9000 per ounce.
Now there is another way of looking at the relationship between the BoE’s balance sheet and gold. The UK owns gold because historically when the UK flirted with different type of gold standards the BoE was required to keep a certain amount of gold on deposit to back the currency being issued.
Here’s what those gold holdings look like going back to 1830:
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The first thing you should notice that for all Chancellor Brown’s infamous gold sales he’s a piker compared to other Chancellors. By far and way the worst sellers of UK gold were Callaghan and Jenkins, selling some 814 tons or 60% of the UK’s gold (compared to Brown’s 44%) at an average price of just £14.
To put that another way that 814 tons, if the UK still had it, would be worth some £30bn today.
So what is the relationship between the gold holding of the UK and the Balance sheet of the BoE?
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The historic long-run average of the BoE’s balance sheet backed by UK’s gold is 25%. Today just 2.7% of the BoE’s balance sheet is back by gold. Now there are only two ways that a return to that long-run average can be done because there is no-way that the balance sheet is going to shrink this side of ‘the big reset’. Either the value of the UK’s gold holdings go up or the UK buys more gold.
So just how much gold would the UK have to buy to get back to that 25% average? It would take an additional 2600 tons. And just how much is 2600 tons? Answer from the GFMS gold survey:
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The entire global gold mined from the ground amounts to about 2850 tons. So for the UK to get back to that 25% average they would have to buy up over 90% of all the gold mined in a single year.
But look what happened during the gold bull run of the 1970s. That topped out at a 40% backing. To get back to 40% would mean the UK would have to buy 4350 tons of gold or 1.5 years worth of every ounce of gold mined on the entire planet.
Clearly the UK isn’t about to pull a China and start buying up the world’s gold supply. So the only way the balance sheet is going to get back to that 25% average is through price.
And how how does the price have to go to get there? An incredible £10,000 to get to 25% and £16,000 per ounce to match the 1980 high.
So the next time you hear someone say that gold is ‘expensive’ or ‘over-valued’ ask them “compared to what?”, because compared to the balance sheet of the BoE (you know, where the money printing comes from so the only thing you really need to compare it to) gold is still woefully UNDERvalued, and in fact on a comparison basis gold is cheaper today than when gold was £13 per ounce in 1967.
Yes, the UK really has printed that much money!
Related posts:
- IMF cuts the UK GDP growth outlook this year and next – prediction of a near £500bn BoE balance sheet by year-end doesn’t look so silly now
- For the UK to return to the Gold Standard today the price of gold would be £23,388
- Comparing the UK gold bull market of the 1970s with today
- IMF revises UK GDP down (again) – is the Bank of England gearing up to print more money in response?
- As the CPI falls for a third month the Bank of England has still produced 41% more price inflation than they should
Link to this article: : http://www.goldmadesimplenews.com/gold/as-the-bank-of-englands-balance-sheet-tops-400bn-heres-why-gold-is-cheaper-today-than-when-it-was-13-in-1967-8371/
Posted by Thomas Paterson on Oct 11 2012. Filed under Gold News.
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