Money Explodes; Gold Glitters; The Recovery Slows

The price of gold has always had a significant correlation (80%) with the Fed’s balance sheet (i.e., the “money supply”), especially during periods of significant balance sheet expansion (money printing).

 

The U.S., clearly the largest western economy, has increased its money supply at a much faster pace than any of the other majors. Note that the EU, the only western economy that approaches the size of the U.S., is growing its money stock at less than 40% of the pace of the U.S. Federal Reserve (Fed).

 

Noteworthy is the fact that the value of all of these countries’ currencies have risen since the virus’ outbreak as the U.S. money supply has exploded and the U.S. Congress has sent helicopter money to the U.S. populous. In fact, at the time of this writing, the U.S. Congress is in the time honored process of having the two major political parties posture on how the opposition party doesn’t care about the American people etc. etc. This, of course, is a prelude to what will be another multi-trillion “stimulus” package. The CARES Act “stimulus” amounted to about $2 trillion, and it’s a pretty sure bet that the upcoming one will be in the same area. That’s $4 trillion total, bigger than the entire GDPs of most of the western world’s economies (only Japan and the combined EU are larger). In fact, the big news out of the EU in the latter part of July was that they finally reached agreement on a “stimulus” package of their own – total was $860 billion! So, $4 trillion vs. $860 billion. Is it any wonder why the dollar’s exchange rate is in free fall?

 

What does all of this have to do with gold’s price? Gold is priced in dollars, and the dollar is the world’s reserve currency. As the dollar falls in value vis a vis other currencies, the price of gold in terms of dollars is going to rise.

 

Gold is the ultimate currency, i.e., it can’t be manipulated by any government. Its supply is limited, growing at a rate of about 2% per year (new mining). Historically, gold has been a hedge against inflation. But it is also a safe haven, i.e., a hedge against uncertainty (like a pandemic). So, it would be natural for its price to rise in the current worldwide pandemic, even without money supply growth. While the U.S. is clearly the money supply glutton, it isn’t as if the money supply of other countries isn’t growing at a faster pace than their economies (i.e., they are also creating excess money, just not as fast as the U.S.). Together, uncertainty and money creation are pushing gold’s price up.