Transcription
The price of gold will reach 38,000 US dollars per ounce. Anyone who hears this sentence and is shocked, don't be alarmed, because there is no price of gold anywhere that will go up to 38,000 US dollars per ounce. Someone saw this number and asked me about it, so I was like, "What price is this?" I went to find information. It turns out that 38,000 US dollars per ounce is not a target price. It never was. It's a price from a theory that if gold is used as a central asset to balance world trade, what should gold be priced at? If you want to know how this number came about, how it was calculated, from which theory, and if it's possible, I've prepared it. I'll tell you.
There's also another matter that gold enthusiasts want to know: "Hey, there's news that there will be a major adjustment in the gold price on July 24th." Today is July 29th, and that major gold price adjustment hasn't happened yet. The question is, what happened and what is about to happen? This clip will tell you. Stay tuned to the Money Monster channel because we talk about money, but today we're continuing with gold. This clip will be a long one.
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Let's start with the major gold price adjustment first. What happened? We'll continue from the previous clip where we talked about China collapsing the paper gold market. China attacked the paper gold market by completely ceasing to trade paper gold. They used their own influence to attack this market. As for progress, who has closed their accounts, or rather, who has closed this service in the market? China used banks considered the largest in the world to close this service. These include China Construction Bank, which is the 3rd largest in the world; ICBC, the 7th largest; China Merchants Postal Saving Bank; Bank of Communications; China City Banks; China Guangfa Bank; and Ping An Bank. A total of 8 banks disappeared from the paper gold market within just 2 months. The combined market capitalization of these 8 banks, according to Company Market Cap data, amounts to 1.13 trillion US dollars. This represents up to 7.6% to 16% of the market capitalization of globally listed commercial banks, which is not a small amount. This led people to think, "Oh, if such large market caps are closing down, something must happen to the gold price." It also forced Chinese investors who wanted to invest in gold into only three options: 1. Sell all their paper gold contracts. 2. Close their positions and switch to other assets. 3. Exchange them for actual gold to keep themselves. This, of course, means that paper gold contracts for retail investors in China are practically non-existent.
What the world has been eagerly awaiting is that the enforcement date was July 24th, right? Everyone thought, "Oh, once it's enforced, the gold price will skyrocket." But it turns out that today, July 29th, the gold price hasn't surged as many people expected. It's been stable, slightly declining. If we look at the bigger picture, gold, from the beginning of the year when it reached an all-time high around 5,600 US dollars per ounce, has now fallen to over 4,000 dollars, a decrease of about 30%. This has led some people to wonder, "Is China really doing this? Is it a bluff?" It's not a bluff, because China is actually doing it. What needs to be understood is that when the market does something, the results don't happen in a single day. Unless the market collapses, and it never collapses in a single day. China has been building its system since 2002, creating the Shanghai Gold Exchange with a system for delivering physical gold, and so on. China has consistently worked on building a physical gold system. Was the step taken on July 24th a big step? Yes, it was a big step, but it doesn't mean this single step, however big, can collapse the Western paper gold market.
But what's interesting is that during the period when gold has been falling from its all-time high by 30%, or is still falling, China has been aggressively accumulating gold in its reserves. And it's not just retail investors accumulating gold; it includes smart money, such as the People's Bank of China, which has been continuously buying gold for 20 consecutive months. This is the longest continuous gold buying streak since 2015. In June alone, China bought a total of 15 tons of gold, which is the largest monthly purchase since 2023. If we count the first 5 months of this year, China has already bought 700 tons of gold. And if we count the total amount China has bought since 2015, the available data shows that China has bought a total of 14,000 tons of gold since 2015 until now.
And what I find more interesting than just China's massive gold purchases is that central banks worldwide are also aggressively buying gold. This can be seen from the reserve asset charts of central banks, where gold now exceeds US dollars. According to available data, in May alone, central banks worldwide collectively bought 41 tons of gold. Who bought it? While I don't have information for everyone, I can mention some: China, as mentioned, Poland, Uzbekistan, and Kazakhstan. I say these are interesting because whether it's China or other countries' central banks that are still buying gold, they are buying it even though the gold price is stable or declining. They are not buying gold for profit or trading; they are buying it for accumulation.
And if someone asks, "Oh, is America worried? How are they responding?" I can tell you, America is fine. Because recently, US Treasury Secretary Janet Yellen reiterated that the United States remains the country with the largest gold reserves in the world, with a current market value of approximately 1 trillion US dollars. This is the more than 8,000 tons of gold at Fort Knox, which Janet Yellen confirmed exists. How could it not exist? Let's hear her statement.
Now, if you ask, "Why is China attacking the paper gold market like this? What's their motive?" There are official and unofficial answers. The official answer is that gold has fallen significantly, by over 30% since the beginning of the year, so they need to protect investors. The unofficial answer, which we've seen China doing all along, is that China wants to be the one to determine the price of gold to be in line with the actual quantity of precious metal, gold, that truly exists in the world. Another point is that China has a demand: they want the world to use a common currency for trade, for the balance of world trade and finance. Regarding China's desire to set a fair price for gold, I discussed this in a previous clip, "China Collapses the Paper Gold Board." I explained that the paper gold market has a value of approximately 630 billion US dollars, while there is only about 500 tons of physical gold, valued at only 70 billion US dollars. Therefore, it means that physical gold is only about 1/9th of the paper gold. This leads to the fair price value, which should actually be around 18,000 US dollars per ounce, but the trading price is only 4,000 US dollars per ounce.
Regarding the statement that China has previously called for a common currency for global balance, when did China start thinking or seriously considering this? It goes back to around March 2009. At that time, the Governor of the People's Bank of China, Zhou Xiaochuan, published an official document titled "Reform the International Monetary System." This means setting a goal to create an international reserve currency not tied to any single nation for stability. Why did they speak out in 2009? Because 2009 was immediately after the subprime mortgage crisis, the crisis of bad home mortgages originating from the United States. As soon as the US debt soured, it spread worldwide. China was one of the countries that became enlightened, realizing that their own coffers, or their foreign exchange reserves, which they thought were rich, were filled with IOUs, US government bonds, or US debt, primarily nearly a trillion US dollars at that time. China then thought, "Why should bad debt in America affect my country's pockets?" This led them to realize that perhaps America wasn't as great as they thought. A country's savings account shouldn't be filled with debt from a country that can print as much money as it wants to pay its debts.
So, Mr. Zhou Xiaochuan thought that they should revive an idea from a man in the 1940s, Mr. John Maynard Keynes. Mr. John's idea was that there should be an international common currency to perfectly balance trade between all nations in the world. This idea of Mr. John Maynard Keynes about a common currency for perfect global trade balance was once directly spoken about by US Trade Representative Michael Froman in Davos. But since then, the United States has not bought into this idea. Because the fundamental idea of the United States is for the US dollar to be the world's reserve currency. They don't want any other currency to be the common currency. In 2010, World Bank President Robert Zoellick, a former US Treasury official, wrote an article in the Financial Times stating that the world should consider using gold as a common currency. Of course, it was met with silence.
Another instance was in 2016, when a man named Ken Rogoff, former chief economist of the IMF, wrote that emerging markets should convert their trillions of dollars in reserves into gold for stability and balance. I mention the proposals of many people in the timeline because, in reality, there is only one currency in the world that can be a common currency: gold. Because we see that gold is the only asset that has endured for a long time. Some might say, "But now there's Bitcoin." Bitcoin is young; it doesn't have a long history. But if we consider a very long history, gold has proven itself to be inflation-proof. Because from 1792 to the present, we see that the prices of everything have gone up when compared to money. We see that the prices of commodities and everything else have skyrocketed compared to fiat money. But if we look at the prices of assets compared to gold, we see that everything has continuously become cheaper, averaging 0.8% per year. If we compare the prices of goods to gold, or if we count from 2018, when the US first started its trade war with China, even in portfolios that many people say are the best, like the S&P 500. From 2018 to the present, compared to fiat money, it has increased by 161%. But this might sound like, "Really?" Because if you compare the S&P 500 to gold since 2018 until now, it's down 1%. Even US government bonds, which are considered safe and stable assets, are in long-term negative territory compared to fiat money, down 31%. But compared to gold, it's a staggering 78% down! And yes, central banks worldwide now hold more gold than US government bonds, which are said to be yield-generating assets.
All of this leads to the possibility that perhaps we don't know what central banks worldwide are doing, what major governments are doing, or if there's a possibility that the world is moving closer to what is called a common currency, or gold backing real assets. And this is the origin of the number that people are currently talking about: gold reaching 38,000 US dollars per ounce. Let me reiterate, it's not a target price. It's just a balanced price according to a formula. This means there are many formulas to calculate what gold should be priced at if it were to back global assets. Gold is limited, but global assets are abundant. Therefore, we need to consider what the price of gold should be if it were to back global assets. There are many ways to calculate this.
Let's take an example from TSCS, an independent analysis firm. They used a formula. They said, "Let's look at China's trade surplus. China's trade surplus is 1.2 trillion US dollars. Now let's look at how much gold China imported this year. China imported 940 tons of gold. So, take the surplus of 1.2 trillion US dollars and divide it by the gold." If this calculation method is used, the price of gold will be 38,000 US dollars per ounce. They said they did this because they calculated how much gold would be needed if China were to use all its gold to pay its surplus. I've looked at this calculation and am still wondering if it makes sense. If you think it makes sense, please comment.
So, I went to look for other formulas to see how they calculate it. There's a model called the Gold Backing Money Supply Model. This is research by someone whose name I can't pronounce. In this model, you need to specify what assets gold will back and what percentage. I'll give an example of a calculation using real data. We'll use the amount of gold in US reserves, which they say is 8,133 tons. This is equivalent to 261,499 million Troy ounces. Let's set that aside and use the M2 figure, the broad money supply, because this is a wider measure, including savings deposits, small time deposits, and retail money market funds. The latest M2 value is approximately 23.05 trillion US dollars. The method is as follows: First, we assume that gold will back M2 100%. To calculate this, take 23.05 trillion US dollars and divide it by 261,499 million ounces. This will give a gold price of 88,154 US dollars per Troy ounce. This is in the case of 100% backing. Anyone holding gold and experiencing this scenario would be very rich.
But if you want to get the popular number of 38,000 US dollars per Troy ounce, it's calculated the same way. It means gold backs M2, but this time it only needs to back about 43.1%. Using the same calculation formula, the gold price will be approximately 38,000 US dollars per Troy ounce. Do you understand now where that number of 38,000 US dollars per Troy ounce comes from? Now that you know, and understand everything, if you want to invest or do anything, be patient. Don't be hasty to get rich. Otherwise, you might not recognize the new millionaires.