• 306 days Will The ECB Continue To Hike Rates?
  • 306 days Forbes: Aramco Remains Largest Company In The Middle East
  • 308 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 708 days Could Crypto Overtake Traditional Investment?
  • 712 days Americans Still Quitting Jobs At Record Pace
  • 714 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 717 days Is The Dollar Too Strong?
  • 718 days Big Tech Disappoints Investors on Earnings Calls
  • 719 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 720 days China Is Quietly Trying To Distance Itself From Russia
  • 721 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 724 days Crypto Investors Won Big In 2021
  • 725 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 726 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 728 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 728 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 731 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 732 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 732 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 734 days Are NFTs About To Take Over Gaming?
Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

  1. Home
  2. Markets
  3. Other

The US Monetary Base and Gold!

US Monetary Base Per Capita vs Gold
Larger Image - Source: www.sharelynx.com

Last week COTW noted that the US monetary base had broken out of an 18 to 20 month sideways pattern. The US monetary base first hit $2.7 trillion back in June 2011 and since then it has ranged between $2.7 trillion and $2.6 trillion. That is until January 2012 when the monetary base hit just under $2.71 trillion. The sharp rise in the US monetary base since 2008 has coincided with the quantitative easing (QE) programs of first QE1 then QE2.

QE2 ended in June 2011. QE3 was announced in September 2012. Under QE3, the Federal Reserve is to purchase monthly $85 billion of mortgage backed securities (MBS) and US Treasuries until such time as the unemployment rate falls to 6.5% while keeping inflation under 2%. At $85 billion a month that is just over $1 trillion annually. QE is an unconventional monetary policy used by central banks to stimulate their economy. Not only is the US using QE as a monetary tool but Japan is pursuing QE quite aggressively. Japan recently increased its QE program from 10 trillion Yen per month to 80 trillion Yen per month. The Euro zone is using QE in order to stimulate the moribund European economy as ECB head Mario Draghi declared they would buy unlimited quantities of European Sovereign debt. China and Britain are also carrying out QE.

There are many different ways to look at the monetary base. The above chart shows the ratio of the US monetary base to the US population. Despite growth in the US population, the monetary base has been rising at an even faster rate. Since October 2008, the US monetary base has gone up 194% from roughly $949 billion to $2,796 billion. Gold has gone up only 102% rising from $828 to $1,672. This suggests that the US monetary base can now buy more ounces of gold at current prices then it could in October 2008. Alternatively, put another way it would take a higher gold price to match the ratio that was seen in October 2008. Gold today would have to be $2,400 to match the ratio seen in October 2008.

That the price of gold has gone up as the monetary base has increased should not be a surprise. A study correlating gold prices to the US monetary base found that the correlation coefficient was 0.94. The chart below shows that correlation.

Casey - Gold Price vs. Adjusted Monetary Base
Source: www.caseyresearch.com

Gold is also closely correlated to the US debt. In October 2008, the US public debt stood at $10.7 trillion. Today it is at $16.3 trillion a 65% increase. As noted above the price of gold has gone up faster. As the debt limit is increased, the price of gold should rise accordingly. The US is adding roughly $1 trillion annually to the deficit.

That is just the reported deficit. The US government GAAP based budget deficit hit $6.6 trillion in 2012. The 5-year average annual shortfall based on GAAP has been $5.2 trillion. That is sharply above the $1.1 trillion officially reported budget deficit. $6.6 trillion is 42% of the US GDP. GAAP accounting is what is typically used by US corporations. The additional deficit includes unfunded liabilities in social programs such as Social Security and Medicare. The unfunded liabilities are reported in terms of net present value (NPV). What all of this suggests is that the US debt situation is even worse than what is being reported.

The US has supposedly 8,133.5 metric tonnes of gold in their reserves (World Gold Council - World Official Gold Holdings). If the US were to use the gold to back the US monetary base, the gold price would have to be $9,745 per ounce. Even backing 40% of the US monetary base the price of gold would need to be $3,898 per ounce. (This assumes that the US gold reserves are still there. Some have suggested they are not. The US has not allowed any independent audit of the gold reserves. Many have called for an audit of US gold reserves. The calls have been rebuffed.).

It has been suggested in some circles that in order for the US to get its monetary house in order it should back its money with gold. What all of these suggests whether looking at the US monetary base per capita compared with gold or using the US gold reserves to back the US monetary base the conclusion is the price of gold is too low. That suggests that while gold has been trading in a range for the past 15 months that could soon end. As the US monetary base rises and as well as the US debt rises gold should go up with it.


Back to homepage

Leave a comment

Leave a comment