The Shadow Price of Gold
This may turn into a series of "what's gold worth?". As of now I have no definitive answers. My goal is to only look at some proposals which will largely be critical. Here's the first.
Some of you may have already seen this but if not here's a link to a brief description: The Shadow Price of Gold.
The shadow price of gold is defined by taking M0 (the monetary base) and dividing it by US gold reserves. The idea is that at one time the monetary base was backed by gold and so the "shadow price of gold" ought to reflect what gold is worth.
There are two problems with this argument, one theoretical and one empirical.
The theoretical problem is that dollars are no longer convertible into gold. As a result the US government has no convertibility need to hold that gold. If the US government were to liquidate all of their gold, the shadow price of gold would be infinite but I fail to see any reason why the market price of gold would go to infinite as well. Alternatively, if the government were to begin purchasing significant amounts of gold, the shadow price of gold would decrease but I would suspect the spot price of gold to increase as supply would diminish.
The only scenario I can think of is if the US currency was rejected by users and the result would be a currency collapse. But I don't know why the amount of gold held by the government would have any effect on that. After all, it makes no difference to me if the US government had 1 tonne of gold or 1 billion tonnes of gold. I can't convert dollars into gold so there's no practical difference to me. I certainly don't believe dollars are presently "backed" by gold.
One can reject these theoretical considerations if the shadow price of gold had some sort of predictive power. That's what the circle in the chart linked suggests. It looks as though the shadow price of gold tracked the spot price to some extent. The problem is that the axes on the chart make it somewhat deceptive. Here's a similar chart based on a log scale. (Note: I had to piecemeal data together from different source so it might not exactly match up. But it looks close enough to me to suggest that my data is somewhat reasonable.)
The next thing to look at is the ratio of the Shadow Price of gold to the spot price.
As can be seen the shadow price has historically been higher than the spot price (with the exception of a brief period in the 1980's).
As a result of both of these considerations, I find that the "shadow price of gold" fails to be a good judge of the value of gold.