Gold and U.S Money Base – June Report

The U.S. Monetary base decreased again during May by 0.92%. This news could suggest that gold will continue to trade down during June (assuming all things being equal). The strong relation between U.S. Monetary base and the changes in gold price was examined in the past: As the U.S. Monetary base tends to contract, the price of gold tends to fall. There also appear to be a lagged correlation between the two, i.e. a decline in U.S. Monetary base during May could suggest gold will decline in June.

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

Gold Price and U.S Monetary base to Gold Reserve  2011 June 14 2012 Furthermore, the relation between lagged by one month U.S. Monetary base (monthly percent change) and gold price is positive and mid-strong. From March 2009 to May 2012 the linear correlation between the two was 0.2911. This relation might suggest that if U.S. Monetary base will keep contracting, gold price might follow this direction in June and decrease. Furthermore, if the FOMC will not introduce another QE program  in the upcoming FOMC meeting to be held next week (June 19-20) it could keep bullion prices from rising (I don’t think the Fed will announce another QE plan in the near future).  

Let examine the lagged linear relation between these two data sets for the previous month:

During April, U.S. Monetary base contracted by 0.64% while the average price of gold fell by 3.78% during May.

During May, U.S. Monetary base contracted again by 0.92%. The interpretation of this news is that, all things being equal, gold price might keep its downward trend and decline during June.

Let’s examine the developments of the “gold base price” 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 figure the “gold base price” which is U.S. Monetary base divided by U.S. gold reserves. During May, this rate reached $9,973 per t oz., which was the lowest price level since December 2011. As a comparison, the actual average price of gold was $1,588 during last month. By dividing the gold base price with gold price we get the ratio between the two. The chart below presents the shifts in this ratio. The ratio started to pick up in the past several months as the monetary base shrunk by a lower rate than gold price.

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

This relation should be taken with a grain of salt, but for now might offer another insight on the future development of gold price. If the upcoming U.S. Monetary base (for June) will continue to shrink it could suggest gold price will continue to fall in the following months.

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