I have just finished listening to Jim Rickard's latest podcast and it got me thinking about the price of Gold and inflation. The way I understand Jim's theory is like this. China would like to hold a equivalent amount of Gold to the US "to be able to look them in the eye".Another reason they want it is that the treasuries position they hold can be hedged against the Gold ,as it is clear that the value of the former will decrease.(in time) So far so good. For my math I had to make a few assumptions ,some of which may be incorrect or even wrong. First, the US holds about 8000 tons of Gold.Second,China holds approximately 1.3 T US$ of treasuries and also wants to hold 8000 t of Gold. I am not entirely sure how the price of Gold will change until that goal is reached but the recent openings of exchanges in China trading Gold makes me feel a little pessimistic about a steady rise. I also do not know what the eventual average price of that Gold will be but for my back of the envelope math I have used US$ 1250 as the price that hedges against those treasury holdings. So,if the US$ looses 1 % the value of the treasuries will drop by 13 000 000 000 US$. If I add that to the $ value of the 8 000 tons of Gold that china hold under this scenario I get a required increase of the price of Gold by 4.04 % ,and a US$ 1290 price tag per ounce. If that is a reasonable assumption and no other drivers for the price of Gold exist, than I can look at my envelope and notice that to bring Gold back to its recent high of US$1940 requires a inflation rate of 17 % !! Mmmmh,I feel a little bit deflated now and hope that someone here can correct any mistakes in my math or add figures of other CB's that have similar intentions. Anyway,it will be fun to work out if my personal hedge against currency devaluation can stack up against the one of the PBoC. Cheers
Be careful....... Know doubt he's a smart man but even Good old Jimmy Rickards does'nt know what tricks The Fed are going to pull next....Unfortuneatly!
