Gold Charts

12 years of the gold bull market have already passed – is it possible that it’s still a good investment?


Here I’ll show you three simple and important charts that estimate the valuation investors are putting on gold right now. By the end of this piece you’ll have an objective understanding of the potential upside in an investment in gold.


Chart 1: What Percentage of Each Dollar Note is Backed By Gold?


Gold Backing the Dollar

The degree to which Federal Reserve Notes are backed by gold. - Click to enlarge. Source: St Louis Fed, World Gold Council


The chart above plots the market value of the Federal Reserve’s gold as a percentage of the Fed’s total balance sheet. The result is the ‘% of the dollar covered by gold’. At the top of a gold bull market the consensus would be that we will see unlimited money printing and so gold would be one of the few stable reserve asset on the Fed’s balance sheet. In this scenario the % of the dollar covered by gold would be 50%+.


With the current gold price and Fed balance sheet size only ~15% of the dollar is ‘backed by gold’. This is far from the extremes that one would expect during the latter stages of a gold bull market. [Note: In the late-1970s / early-1980s the dollar was even ‘over-backed’ by gold (i.e. this metric was over 100%).]


Chart 2: What is Gold’s ‘Fair Value’?


Fair Value of Gold

Gold's 'Fair Value' Vs. The Market Price - Click to enlarge. Source: St Louis Fed, World Gold Council


The second chart shows the ‘fair value’ of gold against the market price. This ‘fair value’ is the price at which the dollar is fully backed by gold. The current price reflects the market’s faith in the integrity of the other assets on the Fed’s balance sheet, namely; Government bonds, Mortgage-backed securities, Federal-agency debt securities, the remnants of AIG & Lehman Brothers and so on… Currently the ‘fair value’ of gold stands at more than $11’000.


Chart 3: What’s the Potential Upside in Buying Gold Here?


Upside in Gold

Upside in Investing in Gold - Click to enlarge. Source: St Louis Fed, World Gold Council


This chart demonstrates the ‘potential percentage upside’ in investing in gold. At present the gold price would have to increase more than five times to reach ‘fair value’. This reveals the surprisingly large upside in gold given the age of the bull market.