What is the ideal Gold-Dollar peg price?

Forbes has piece by Louis Woodhill that argues for a $225/oz peg for the dollar.

I think that price is wrong for several reasons. It is way too low. The starting for any discussion about a dollar to gold ped is the current market price.

Currently, an ounce of gold will get you (in round numbers where I live):
- 350 gallons of gasoline
- 400 gallons of milk
- 1000 rides on the bus,
- 700 cups of coffee at Starbucks (Grande)
- 3 iPad2s 16 gigs, 3G
- 3 low end 1911 45acps (thinking Rock Island Armory GI version as an example)

Mind you, you have to exchange your ounce of gold to currency to make thos purchaces, but the fact remains, with an ounce of gold in your hand, you can command the above into your possession.

Institute a dollar gold peg at $225/oz, the relationship between an ounce of gold to what it can buy changes dramatically. I would need more than 2 ounces of gold to pick up a low end 45. The Fed would wind up selling all their gold at essentially garage sale liquidation prices.

L.W. bases his $225/oz price on changes in the consumer price index since we went off the gold standard. But He fails to take into account improvements in productivity over the years. All things being equal, had we been on a gold all along, we would have seen a slow reduction in prices due to improvements in productivity, similar to what we experience and take for granted with computers and electronic equipment.

So that argues for a higher gold price than $225/oz.

At the same time, I believe that the current gold price is somewhat forward looking, that it anticipates expansion of the money supply that is anticipated but not yet occurred. If you take that anticipated expansion off the table with concrete plans to return to a gold standard, the price should drop. People will prefer to hold gold denominated assets that pay a return rather than gold itself. That would put downward pressure on the gold price.

I would argue for a transition period where we find out what the natural gold price is. For example, you could set a date certain of a return to the gold standard with peg price being the previous 12 month moving average. I think something along those lines would stand the best chance of getting the gold peg price right.

Btw, the 10 gold coin in the picture contains about a 1/2 ounce of gold. Today a 1/2 oz American Eagle or 1/2 Kugerrand goes for about $800.

- Posted using BlogPress from my iPad