FOOD FOR THOUGHT: All That Glitters Might Be Gold – Part 1
Wednesday, November 11th, 2009Although Gold might be a bit stretched in the short term, it is not hard to see where it could go a lot higher in the long run. I found some interesting charts on Agora Financial website that fall into the “a picture is worth a thousand words” category.
First, let’s look at the expansion in the monetary base.
The monetary base is not only in a vertical ascent, but also without precedence. We have never seen anything like this. The monetary base is essentially the Federal Reserve Bank’s currency and reserves. Now, with an expansion like this you would think inflation would be rearing its ugly head, but as hedge fund manager John Paulson points out “that’s because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, almost 1-to-1 between the two.”
So what does this mean? I think it means that soon or a later the money supply will follow, and if money supply grows faster than the economy, that will create inflation. I don’t know how you feel, but it looks to me to be practically impossible that the economy could outgrow that spike in the above chart.
Second, let’s look at the growth of Gold production (or lack of it) versus the money supply.
Gold mine production is actually negative over the last 9 years or so while the money supply has grown substantially. As Paulson points out, global money supply is 72 times the value of gold. If that gap narrows even just a little gold will move higher.
Finally, let’s look at the Dollar vs The so-called recovery that is underway.
The Currency of a country is in fact a decent gauge of economic strength. If we are really recovering why is the dollar so weak? On the other hand stock prices are recovering rapidly. Is this because of economic recovery or the expansion in the monetary base? Is productivity really picking up or is it because of cost cutting and layoffs? The S&P is trading at 19.55 times earnings as of 11/10/2009, certainly not cheap.
On the other hand, considering the rise in the monetary base and the weakness in the dollar, coupled with rising demand as a alternative currency globally, and the reduction in gold mining production… gold does look cheap in the longer term.
on November 12th, 2009 at 11:28 PM Said:
I think this is one of the dirty little secrets that everyone wants to find out about, no one wants to tell you, and no one wants to believe.
If we look at historical data we know that every time that a currency has collapsed since the beginning of time has followed the same path we are in.
Whether or not this happens again is yet to be seen in the mean time the laws of supply and demand are obvious there is such a shortage of gold and silver that one needs to think what is actually going on.
Great post mate
on March 2nd, 2010 at 11:14 AM Said:
[...] This will be discussed further in part 2. Related Post [...]
on March 4th, 2010 at 12:10 PM Said:
[...] are just our viewpoints on some recent developments in the Gold market. Please read “All that Glitters May Be Gold”, a previous post, as those arguments still are [...]