Gold Price and U.S Money Base – May Report

The U.S. Monetary base declined again during April by 0.67%. This news might mean that gold price will continue its downward trend during May (assuming all things being equal). The strong relation between U.S. Monetary base and the changes in gold was analyzed in the past: As the U.S. Monetary base tends to contract, the price tends to decrease as well.

The following chart presents the development of gold price (monthly average prices) and U.S. Monetary Base during 2011 and 2012 (up to April). According to the chart, U.S. Monetary base contracted during the last couple of months which might partially explain the decline in gold uring that time.

Gold Price and U.S Monetary base to Gold Reserve  2011 May 7 2012 Furthermore, the relation between lagged by one period (month) U.S. Monetary base percent change and monthly change in price is positive and mid-strong. From March 2009 to April 2012 the linear correlation between the two was 0.274. This relation might suggest that if U.S. Monetary base will keep shrinking, the metal price might follow this path next month and decrease. Furthermore, if the FOMC will not hint of another QE program it could further pressure down bullion prices (but I don’t think the Fed will do so in the near future).  

Let’s examine the lagged linear relation between these two data sets for the previous month: During March, U.S. Monetary base contracted by 1.54% while the average price  fell by 1.56% during April.

During April, U.S. Monetary base contracted again by 0.67%. the interpretation of this news is that, all things being equal, the yellow metal might continue its downward trend and moderately decline during May.

Now let’s examine the developments of the “gold base ” compared with gold price by using the U.S. Monetary base and the U.S. gold reserves, which currently stands at 8,133.5 tonnes (or 261 million t oz.); via the gold reserves one can calculate the “gold base price” which is U.S. Monetary base divided by U.S. gold reserves. During April, this rate reached $10,064 per t oz. compared with the actual average price, which was $1,650 during last month. 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 several months and only slightly rose as the monetary base slightly shrunk by a lower rate than gold price.

RATIO OF U.S Monetary base to Gold Reserve TO Gold Price  2011 MAY 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 May) will continue to contract it could suggest gold price will continue to decline during the months to come.

For further reading:

Gold and Silver Weekly Outlook for May 7-11

Gold and Silver Outlook for May 2012

Did the Liquidity Trap Cause the Hike in Gold Price?