Examining the Gold Price in Light of the U.S Money Base – April Report

I have already examined in the past the relation between the U.S. Monetary base and the changes in gold price. As the U.S. Monetary base tends to expand, the price of gold tends to increase as well. Let examine the recent changes in these two fronts and try to make sense of the changes in gold prices in light of the changes in the U.S money base. 

The following chart shows the development of gold price (monthly average prices) and U.S. Monetary Base during 2011 and 2012 (up to March for Gold price and up to February for U.S. Monetary Base). According to the chart, U.S. Monetary base expanded during the last couple of months which could partially explain the rise in gold price.

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

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 March 2012 the linear correlation between the two was 0.25. This relation might suggest that if U.S. Monetary base will keep expanding, gold price might follow the next month and increase. Furthermore, if the FOMC will introduce another QE program it could further pressure up bullion prices (but I don’t think the Fed will do so in the near future).  

E.g. during February, U.S. Monetary base expanded by 2% while the average price of gold fell by 3.79% during March. This means the fall in gold price during March had little to do with the expansion of the money base so that the fall was perhaps more speculative than fundamental.

There is another way to look at the relation between the  monetary base and gold price by using the U.S. gold reserves, which currently stands at 8,133.5 tonnes (or 261 million t oz.); with the gold reserves I can calculate the “gold base price” which is U.S. Monetary base divided by U.S. gold reserves. During February, this rate reached $10,291 per t oz. compared with the actual price of gold, which was $1,744. By dividing the gold base price with gold price we get the ratio between the two. The chart below shows the development of this ratio. The ratio remained nearly unchanged in the past couple of months and only slightly fell as the monetary base slightly expanded by a lower rate than gold price.

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

This relation should be taken with a grain of salt, but for now might offer another perspective on the development of gold price. If the upcoming U.S. Monetary base (for March) will expand again it could suggest gold price will rise again as it did in January.

For further reading: