Gold Should Lose Its Midas Touch

The money supply is either stagnant or declining, depending on how you measure it, in spite of a 1% fed funds rate here in the U.S. and aggressive interventions on behalf of the dollar by other central banks. The year-over-year growth of M2 is down to 4.5%, just above the 4.3% growth of GDP. So I thought I should check my own money supply to see how things were holding up.

I am talking about quality, not the more-often checked quantity. I pulled a dollar bill out of my wallet and checked the design on the back carefully to see whether those redesign maniacs at the Treasury, the same ones who keep enlarging Andrew Jackson's head, had messed with the Great Seal on the back. No, they had not; underneath the unfinished pyramid with the disembodied Eye of Providence is the Latin motto novus ordo seclorum, meaning "A new order of the ages." (By the way, the history of the Great Seal is an amazing one; you can read about it here.)

Whither Gold?

The timing of this inquiry was propitious, no doubt, for the nature of the Federal Open Market Committee's policy pronouncement last Wednesday may be rightfully construed as the first step of a secular change in monetary policy. It was a warning to the carry traders and others who have been feasting on cheap credit to get their affairs in order if they care anything at all about their next of kin.

Gold, interestingly enough, anticipated this change by nearly two weeks. Cash gold hit its intraday high on Jan. 6, shortly after Fed Governor Bernanke's New Year's weekend speech, which was interpreted by many as a promise to continue pumping out money regardless of the consequences, and it has been in retreat since Jan. 12. The euro hit its high against the dollar on the same day; the linked movements are hardly coincidental.