Gold Doesn't Fear a Fed Rate-Hike Pause

The CPI, many gold bugs believe, is not to be trusted. A real gauge of inflation, they argue, is M3, which is the largest measure of the money supply. And guess what? That weekly measure, which used to rock the bond and stock markets in the 1970s, is going to be scrapped on March 23.

The explanation on the Fed's Web site reads: "M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits."

If you ask gold bugs, however, the Fed is trying to hide something. M3 includes the smaller measures of the money supply, such as M1 and M2, plus large time deposits, institutional money market accounts, and eurodollar deposits of U.S. banks held at foreign branches and at all U.S. offices. While the first two measures are mostly held by the public, M3 is about putting "money into the system," writes David Chapman, director of the Millennium Bullion Fund.

The first leg of today's inflationary environment, Chapman says, started when former Fed Chairman Alan Greenspan cut rates in the early 1990s to stave off a recessionary environment. The latest leg came after the Fed cut rates to historical lows after the bursting of the tech bubble and the 9/11 attacks. Since 1995, M1 has risen 18.8%, M2 is up 89.5%, and M3 has increased a stunning 130%, Chapman notes.

"The Fed has been running a well-managed hyperinflationary environment," says John Strafford, a gold analyst and editor of The Strafford Newsletter. "They must inflate or die."

But why remove M3 now?

Iran was expected to launch an exchange next week to start trading its oil in euros instead of dollars. Given current geopolitical tensions, a possible huge rush out of dollars would occur, and that would have hit M3 the most. A sharp drop in M3 has typically been seen as presaging recession, and markets would have panicked, says Chapman.