Can We Predict Future Gold Price via the U.S. Money Base?

I have already referred to the relation between the expansion of U.S. Monetary base and the development of gold price. As the U.S. Monetary base expands, the price of gold tends to rise as well. Can we use this relation to learn more on the future development of gold price?  

The following chart presents the development of gold price and U.S. Monetary Base during 2011. According to the chart, U.S. Monetary base expanded mainly during the first half of the year due to the Fed’s second Quantitative Easing Plan.

Gold Price and U.S Monetary base to Gold Reserve  2011 February 7 2012

The sharp gains in gold price were also mainly during the first part of 2011.

In fact, the relation between lagged by one period U.S. Monetary base percent change and change in gold price is positive and mid-strong. From March 2009 to December 2011 the linear correlation between the two was 0.2798. This relation might suggest that if U.S. Monetary base will continue to expand, gold price might follow the next month and rise.

E.g. during December, U.S. Monetary base expanded by 0.46% while the price of gold rose during January by 1.02%.

Another way to look at the relation between the  monetary base and gold price is by using the U.S. gold reserves, which currently stands at 8,133.5 tonnes (or 261 million t oz.); by using the gold reserves I can calculate the “gold base price” which is U.S. Monetary base divided by U.S. gold reserves. For the December this rate reached $9,984 per t oz. compared with the actual price of gold, which was $1,644. By dividing the lagged by one period gold base price with gold price we get the ratio between the two. The chart below shows the development of this ratio. The ratio declined during January as the monetary base expanded by a lower rate than gold price.


RATIO OF U.S Monetary base to Gold Reserve TO Gold Price  2011 February  2012

This relation should be taken with a grain of salt, but for now might offer another perspective on the future development of gold price. If the upcoming U.S. Monetary base (for January) will expand again it could suggest gold price will continue to rally during February.

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