first majestic silver

The US Monetary Base and Gold

February 7, 2013

Last week COTW noted that the US monetary base had broken out of an 18 to 20 month sideways pattern. The US monetary base first hit $2.7 trillion back in June 2011 and since then it has ranged between $2.7 trillion and $2.6 trillion. That is until January 2012 when the monetary base hit just under $2.71 trillion. The sharp rise in the US monetary base since 2008 has coincided with the quantitative easing (QE) programs of first QE1 then QE2.

QE2 ended in June 2011. QE3 was announced in September 2012. Under QE3, the Federal Reserve is to purchase monthly $85 billion of mortgage backed securities (MBS) and US Treasuries until such time as the unemployment rate falls to 6.5% while keeping inflation under 2%. At $85 billion a month that is just over $1 trillion annually. QE is an unconventional monetary policy used by central banks to stimulate their economy. Not only is the US using QE as a monetary tool but Japan is pursuing QE quite aggressively. Japan recently increased its QE program from 10 trillion Yen per month to 80 trillion Yen per month. The Euro zone is using QE in order to stimulate the moribund European economy as ECB head Mario Draghi declared they would buy unlimited quantities of European Sovereign debt. China and Britain are also carrying out QE.

There are many different ways to look at the monetary base. The above chart shows the ratio of the US monetary base to the US population. Despite growth in the US population, the monetary base has been rising at an even faster rate. Since October 2008, the US monetary base has gone up 194% from roughly $949 billion to $2,796 billion. Gold has gone up only 102% rising from $828 to $1,672. This suggests that the US monetary base can now buy more ounces of gold at current prices then it could in October 2008. Alternatively, put another way it would take a higher gold price to match the ratio that was seen in October 2008. Gold today would have to be $2,400 to match the ratio seen in October 2008.

That the price of gold has gone up as the monetary base has increased should not be a surprise. A study correlating gold prices to the US monetary base found that the correlation coefficient was 0.94. The chart below shows that correlation.

      



Gold is also closely correlated to the US debt. In October 2008, the US public debt stood at $10.7 trillion. Today it is at $16.3 trillion a 65% increase. As noted above the price of gold has gone up faster. As the debt limit is increased, the price of gold should rise accordingly. The US is adding roughly $1 trillion annually to the deficit.

That is just the reported deficit. The US government GAAP based budget deficit hit $6.6 trillion in 2012. The 5-year average annual shortfall based on GAAP has been $5.2 trillion. That is sharply above the $1.1 trillion officially reported budget deficit. $6.6 trillion is 42% of the US GDP. GAAP accounting is what is typically used by US corporations. The additional deficit includes unfunded liabilities in social programs such as Social Security and Medicare. The unfunded liabilities are reported in terms of net present value (NPV). What all of this suggests is that the US debt situation is even worse than what is being reported.

The US has supposedly 8,133.5 metric tonnes of gold in their reserves (World Gold Council – World Official Gold Holdings). If the US were to use the gold to back the US monetary base, the gold price would have to be $9,745 per ounce. Even backing 40% of the US monetary base the price of gold would need to be $3,898 per ounce. (This assumes that the US gold reserves are still there. Some have suggested they are not. The US has not allowed any independent audit of the gold reserves. Many have called for an audit of US gold reserves. The calls have been rebuffed.)

It has been suggested in some circles that in order for the US to get its monetary house in order it should back its money with gold. What all of these suggests whether looking at the US monetary base per capita compared with gold or using the US gold reserves to back the US monetary base the conclusion is the price of gold is too low. That suggests that while gold has been trading in a range for the past 15 months that could soon end. As the US monetary base rises and as well as the US debt rises gold should go up with it.

 

copyright 2013 All Rights Reserved David Chapman

General Disclosures

The information and opinions contained in this report were prepared by MGI Securities. MGI Securities is owned by Jovian Capital Corporation ('Jovian') and its employees. Jovian is a TSX Exchange listed company and as such, MGI Securities is an affiliate of Jovian. The opinions, estimates and projections contained in this report are those of MGI Securities as of the date of this report and are subject to change without notice. MGI Securities endeavours to ensure that the contents have been compiled or derived from sources that we believe to be reliable and contain information and opinions that are accurate and complete. However, MGI Securities makes no representations or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to MGI Securities that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. The reader should not rely solely on this report in evaluating whether or not to buy or sell securities of the subject company.

Definitions

"Technical Strategist" means any partner, director, officer, employee or agent of MGI Securities who is held out to the public as a strategist or whose responsibilities to MGI Securities include the preparation of any written technical market report for distribution to clients or prospective clients of MGI Securities which does not include a recommendation with respect to a security.

"Technical Market Report" means any written or electronic communication that MGI Securities has distributed or will distribute to its clients or the general public, which contains an strategist's comments concerning current market technical indicators.

Conflicts of Interest

The technical strategist and or associates who prepared this report are compensated based upon (among other factors) the overall profitability of MGI Securities, which may include the profitability of investment banking and related services. In the normal course of its business, MGI Securities may provide financial advisory services for issuers. MGI Securities will include any further issuer related disclosures as needed.

Technical Strategists Certification

Each MGI Securities technical strategist whose name appears on the front page of this technical market report hereby certifies that (i) the opinions expressed in the technical market report accurately reflect the technical strategist's personal views about the marketplace and are the subject of this report and all strategies mentioned in this report that are covered by such technical strategist and (ii) no part of the technical strategist's compensation was, is, or will be directly or indirectly, related to the specific views expressed by such technical strategies in this report.

Technical Strategists Trading

MGI Securities permits technical strategists to own and trade in the securities and or the derivatives of the sectors discussed herein.

Dissemination of Reports

MGI Securities uses its best efforts to disseminate its technical market reports to all clients who are entitled to receive the firm's technical market reports, contemporaneously on a timely and effective basis in electronic form, via fax or mail. Selected technical market reports may also be posted on the MGI Securities website and davidchapman.com.

For Canadian Residents: This report has been approved by MGI Securities which accepts responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions should do so through a qualified salesperson of MGI Securities in their particular jurisdiction where their IA is licensed.

For US Residents: This report is not intended for distribution in the United States.

Intellectual Property Notice

The materials contained herein are protected by copyright, trademark and other forms of proprietary rights and are owned or controlled by MGI Securities or the party credited as the provider of the information.

Regulatory

MGI SECURIITES is a member of the Canadian Investor Protection Fund ('CIPF') and the Investment Industry Regulatory Organization of Canada ('IIROC').

Copyright

All rights reserved. All material presented in this document may not be reproduced in whole or in part, or further published or distributed or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of MGI Securities Inc.

David Chapman regularly writes articles of interest for the investing public. David has over 40 years of experience as an authority on finance and investments via his range of work experience and in-depth market knowledge.


With gold stolen by Conquistador Francisco Pizarro from the Inca Empire in 1532, Spain financed its conquest of Europe.
Top 5 Best Gold IRA Companies

Gold Eagle twitter                Like Gold Eagle on Facebook