How are Gold and Money Supply Related?

Mish

M1 and M2 Money Supply numbers are surging. Will gold follow?

Let's investigate an alleged relationship between gold and M2, a measure of money supply in the US. 

Let's also investigate what's happening with M1, a more narrow measure of money supply.

Clear Correlation?

The Tweet claims something different than my lead chart depicts. So let's investigate the above idea in other time frames.

Note: This subject came up again today, this time in reference to M1. It's an important topic because it is widely misunderstood. 

This is a repost with an additional fresh chart on M1 at the end plus a discussion of how M1 is distorted by Sweeps.

Gold vs Rate of Change in M2 Money Supply

Gold vs Rate of Change in M2 Money Supply

If we look at longer time frames, the rate of increase in M2 theory falls flat on its face.

One can force a correlation starting in 2010 but that is purposeful cherry-picking a timeframe. and even then, the time period in the box is counter-trend.

Cherry-Picking Timeframes

If you have to cherry-pick timeframes, especially when there are totally random results outside that timeframe, the relationship is imaginary.

Similarly, one can find times when gold is correlated to the dollar, the Yen, and most likely the popularity of peanuts at Cub games in some time frame.

Gold vs Faith in Central Banks 

Gold vs Faith in Central Banks 2020-01-01 PNG

The best correlation I can find to the price of gold is faith in central banks. Gold collapsed from $850 to $250 under Greenspan's "Great Moderation". Greenspan was viewed as the "Maestro" until the dot-com bubble collapsed.

Gold went on a tear during the housing bubble, but put in a top when ECB president Mario Draghi gave his famous speech: "We will do whatever it takes to save the Euro, and believe me it will be enough."

Draghi Q&A

  • Q: What did Draghi do?
  • A: Absolutely nothing!

Draghi did nothing. His speech was enough. Bond yields on Greek, Portuguese, and Italian bonds started collapsing right after that speech. It was not until years later the ECB resorted to negative interest rates and QE.

Gold started rising again when the ECB went nuts with QE and the Fed started talking about "normalization" that anyone in their right mind knew was not coming.

Massive QE and Inflation

Yes, the Fed has turned on QE to an extent few thought possible.

But that did not ignite inflation in any meaningful way, at least as measured by the CPI.

The Core CPI Declines 3 Months for the First Time Ever

On Jun 10, I noted The Core CPI Declines 3 Months for the First Time Ever.

My headline will have the inflationistas howling from the rooftops because they will not even bother reading what I said inside.

Poor Measure of Inflation

These indexes supposedly measure inflation.

They do nothing of the kind. The indexes do not include home prices, only rent.

The purported medical inflation is a joke. Anyone who buys their own medical insurance will tell you their costs are up more than the reported 5.9%.

Anyone in college has not been pleased with the rising cost of tuition and rent in college towns.

And anyone with an ounce of common sense knows the current stock market bubble is a measure of inflation.

Lie of the Day, Month, and Year

The Fed and economists pretend that "inflation" is only up 0.1% year-over-year.

The Fed and economists in general do not know how to measure "inflation".

And the Fed's efforts to produce it has created destructive bubbles sure to pop causing the deflation they hope to prevent.

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

"Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations

Asset Bubble Deflation

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.

The Problem is Not Deflation, It's Attempts to Prevent It

For discussion of asset bubbles and inflation, please see The Problem is Not Deflation, It's Attempts to Prevent It.

Struggle to Maintain Control

The Fed is struggling to keep things under control. It is afraid of another credit bust like we had in 2008-2009, and rightfully so.

Are things under control? Clearly not.

Is money supply an indicator?

Perhaps, so, but the important point is not the QE, but rather that people know the Fed has again lost control.

Speculators Dump Gold But Price Goes Up Anyway

Misconceptions about gold are rampant.

Here's another example: Contrary to popular belief, jewelry purchases are meaningless to the price of gold.

It's monetary demand that sets the price.

For discussion, please see Speculators Dump Gold But Price Goes Up Anyway.

M1 vs Gold

I was recently asked about M1. Here is the chart of M1.

M1 vs Gold 2021-01-04

As you can see there is no correlation between M1 and the price of gold. 

Where's the Cash?

By the way, M1 is a very distorted number, influenced by Sweeps. Greenspan approved sweeps in 1994. In a sweeps program, a bank automatically transfers funds from non- interest-bearing accounts with reserve requirements to interest-bearing accounts without reserve requirements.

This is done nightly with no say by the bank customer. 

It is fraudulent. Money that is supposed to be available on demand, really isn't available on demand. 

I discussed this way back in 2007 in Where's the Cash? 

Mish

Comments (25)
No. 1-12
goldguy
goldguy

One thing that is very important in pricing gold, confidence or lack of confidence in government. Once the public loses confidence in there government, that is when the gold price goes vertical...we are not there yet in America, but, I think we are very close.

Greggg
Greggg

As of Wednesday

The gold certificate account reflects the receipts issued to the Reserve Banks by the Treasury against its gold holdings. In return, the Reserve Banks issue an equal value of credits to the general account of the Treasury, computed at the statutory price of $42.22 per troy ounce. Because nearly all of the gold held by the Treasury has been monetized in this fashion, the Federal Reserve Banks' gold certificate account of $11 billion represents the nation's entire official gold stock.https://fred.stlouisfed.org/series/WGCAL

nzyank
nzyank

In today's society, gold and its price seem to me to be pretty much meaningless....not sure what one would ever do with it, and not practical to use as a means of exchange.

JonSellers
JonSellers

"It is fraudulent. Money that is supposed to be available on demand, really isn't available on demand."

If it is legal, by definition it isn't fraudulent. I'm sure banks keep a small reserve of cash to meet normal consumer demand.

bluestone
bluestone

but its all fiat and everybody already knows.
The inflection point and its THE inflection point, in a system where central banks -always- defeat deflation is when they lose control of inflation.
And thats it.

Eddie_T
Eddie_T

Possible other reasons for a spike in M1:

People taking equity out of their homes as part of the recent spate of refinancing at lower rates.....because of COVID.

People holding more cash in reserve than normal.....because of COVID.

People moving various kinds of cash equivalents, like savings accounts and equity in whole life insurance policies...into their checking accounts....because of COVID.

Helicopter money sitting in checking accounts...because of COVID.

None of those has much to do with gold.

Scooot
Scooot

Hi Mish I agree that the Gold Price doesn’t track M1 closely, you certainly couldn’t trade from it, but the trend is loosely the same, which has been up, as M1 and the monetary base grew, gold followed, albeit in a volatile fashion. It’s good to know about the monetary sweeps.
A bit like the S&P and company earnings, looking at this chart there also isn’t a close relationship between the S&P and company earnings, but we know ultimately there is.

njbr
njbr

Is it different this time?

There are way too many economic items bucking historic patterns.

It'll be glorious, or it'll be tragic.

Money for electrons, clicks are free...

FromBrussels
FromBrussels

Mish, WHY is that fckn Euro currency monster so strong ? It is not that everything is hunky dory here, is it, for it definitely IS NOT,... I should and would be happy about it, if it weren t for the fact that I am heavily invested in other currencies for lack of faith in this counterfeit currency, created with the one and only purpose to benefit export driven Germany, a currency too weak for Germany and too strong for the other countries allowing them to 'happily' buy german products.....

Anda
Anda

"Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse."

That is "too kind" of you I think. It is more like CPI is just a cover for monetary expansion targeting assets and for political motives.

"As you can see there is no correlation between M1 and the price of gold."

Looks like it sets a floor to me.

Jewellery and gold price ?

Jewellery is trade and ownership of gold, it affects the price - probably reduces volatility, but the big moves are not related. If you own gold, owning it affects the price paid for other goods, as compared to owning dollars. So it is fair to say that it affects the price. It is a question of relativity.

Brexitologist
Brexitologist

Brexit with EU gold vaulted in London...
Decades ago, led by the Soviet threat, current EU member states entrusted their physical gold bullion reserves in custody at the Bank of England (BoE) in London.
Now, with hard-Brexit + Covid-19

  • The City would only return the EU gold exclusively under very London-favorable terms, if any.
  • Or, such EU gold cannot be returned because it has been sold off or loaned out or compromised in different ways as explained below.
    Should the Davos crowd be forced to re-establish anything similar or equivalent to a gold or SDR standard (quite probable) the matter will aggravate a 100-fold, even more.
    Because many or all EU members would now want to simultaneously repatriate their BoE-vaulted gold partially or totally for many good reasons, Covid-19 included. Beware: recently Germany had to wait 5 years to forcefully repatriate only 50% of its gold and never received back any single one of the gold bars it had originally deposited, which clearly explains the delay.
    The problem is NO independent audit has ever been carried out (see sources below) in order to answer the following key questions:
    (a) does the BoE still have everybody´s gold bullion... or has it been sold off or loaned out already (partially or totally) as many true experts insist is the case ? (see links below)
    (b) is the BoE willing and able to return EU gold it may still have to legitimate owners ? Who are the legitimate owners ? Would the ECJ decide gold ownership ? On what basis ?
    (c) has the BoE lent out, swapped, re-hypothecated or encumbered such bullion now lien with other alleged legitimate claimees also standing in line with ´fractional un-allocated synthetic´ bullion custodies unfit-for-purpose per Digital Derivative Pricing Schemes “(sic, I kid you not) thru which no one can know who owns what where (if anything) ? Of course, the ECB would also claim it actually is "their" EU gold while the IMF and the BIS would also meddle, of course.
    Paraphrasing James Carville, “ It´s the gold, stupid ”
kelsey williams
kelsey williams

Good article, Mish!

Here's my take on the subject. The price of gold tells us nothing about gold. Gold's rising price over time is reflection of the loss in purchasing power of the US dollar. That loss in purchasing power (higher prices in general) is a direct result (the effects) of the inflation (i.e., debasement of money by government) that has already been created. The effects are unpredictable and volatile.

Also, gold is not forward-looking. It responds after the fact to the loss in dollar purchasing power; not to the increase in money supply or the expectations for inflation.

Over the past century, the US dollar has lost 98-99% of its purchasing power. That correlates to a gold price in dollars of somewhere between $1000 ($20 per ounce x 50) and $2000 ($20 per ounce x 100).

Finally, gold is not an investment. It is real money and a store of value. An ounce of gold today at $1900 is actually cheaper in dollars than at its peak in 1980 at $850 because of inflation. Over time the best you can expect is for gold to hold its own value which is stable and unchanging; regardless of its price in dollars or any other currency. That has been gold's role for 5000 years.

Kelsey Williams
@Kelsey's Gold Facts


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