For the UK to return to the Gold Standard today the price of gold would be £23,388

Last week we compared the 1970s gold bull market with today’s. We concluded:

For gold in the UK to match the bull market of 1970-80 its final destination would be well north of £4500. But if you take in to account that the money printing this time round has been 3 times as great you could make the argument that gold should be trading easily into 5 figure territory at over £12,000 an ounce.

With gold trading a record highs in dollars, euros and pounds we’ve taken another analytical approach to see if we can discover what the ultimate destination of gold might be in the UK.

Rather than roll the bones, put a licked finger in the air or read some tea leaves there is actually a pretty good technical way of putting a figure on gold’s ultimate destination.

It is possible to look at the UK economy and get a rough idea what the ‘real’ price of gold should be today. All we need to know are a few things. We need to know how much gold is at the Bank England to back the currency and then we need to know who many £ notes are in circulation or held in reserve. Luckily we know both these things.

First up how much gold does the UK ‘own’?

In metric tonns:

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In troy ounces:

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Next up we need to know how much money was in circulation. And the place to find that out is the balance sheet of the Bank of England. We’ll leave the detail of the workings of the BoE’s balance sheet for another day but essentially it tells out how much physical £ notes are in circulation (around £50bn at last check) but also how much electronic money is available to be lent into the economy via the banks. So how much money has been created since 1830?

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The above chart should scare you – as you can see, going all the way back to 1830 the scale of the money printing we’ve seen in the past 4 years is almost literally off the charts. When charts go parabolic like that it rarely ends well.

And finally for completion here is the value of the UK’s gold holdings since 1830. Note if the UK had the same amount of gold as it did in 1960 the value of the gold would be over £76bn.

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Right, so now we have all the information we need to calculate what the value of gold today should be when priced in pounds to cover the BoE’s balance sheet. We have the money supply and we have the amount of gold at the BoE. So from 1830 to 1965 just how many pounds were in existence to cover 1 ounce of gold?

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In 1850 the balance sheet of the BoE was about £63m, there where 2.63m ounces of gold sitting in a vault at the BoE. So for every ounce of gold there was about £18 in existence. The gold price was set at £4.25 so about 25% of UK money supply was backed by gold.

By 1921 the balance sheet of the BoE was about £300m, there was 27m ounces at the BoE. So for every ounce of gold there was about £10 pounds in existence. The price was set at £5.35 so about 50% of the UK money supply was backed by gold.

By 1965 the balance sheet of the BoE was about £3bn, there were about 65m ounces at the BoE. So for every ounce of gold there was about £50 in existence. The price of gold was £12.5 so about 25% of the UK money supply was backed by gold.

Even though the UK has dabbled with a gold standard twice (1816 and 1925) neither appear to have been a full 100% backing. And between 1830 and 1970 about 25% of the money supply was backed by gold – this is calculated by multiplying the price of gold by the amount held at the BoE and dividing that by the BoE balance sheet.

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Over this 140 year period we can see that the gold value backing the UK money supply has ranged from just under 15% at the lowest to 50% at the peak, with 25% being the average. So what about today?

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As of today at a price of £980 just 4% of the BoE balance sheet is backed by gold. In fact if you take a look at the above chart from 2000 where the gold price has gone from about £170-£980 the percentage of the UK money supply backed by gold has actually fallen from 12% to just 4% today. This means that the money printing at the BoE has far outpaced the rise in the price of gold.

So today how many pounds are there in existence on the BoE’s balance sheet per 1 ounce of gold? Remember from the chart above that between 1830-1950 the figure was £20, and between 1950-65 the figure was £40:

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Yes you read that correctly, for every ounce sitting at the BoE they have created £23,388. Or to put it another way if the UK went back on a full 100% reserve gold standard the price of gold would be a staggering £23,388.

History tells us that the UK at its peak backed the money supply with 50% the value of its gold holdings. Should the UK go back to this historic peak the price of gold would be about £12,000. Interestingly this is the same figure we reached when comparing the 1970s bull market with today’s in our previous article mentioned at the start of this piece.

Related posts:

1. Greece should return to the gold standard
2. Jim Rickards: Return to a Gold Standard Inevitable
3. Should We Return to the Gold Standard?
4. Is Switzerland planning a return to the gold standard?
5. World Bank President Suggests Return to Gold Standard

Link to this article: : http://www.goldmadesimplenews.com/gold/for-the-uk-to-return-to-the-gold-standard-today-the-price-of-gold-would-be-23388-4605/

Posted by Thomas Paterson on Jul 15 2011. Filed under Analysis, Gold News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry