GOLD

Monetary Base Breaking Out! Will Gold Prices Follow?

David Chapman

After 18 months of going sideways, the monetary base appears to be breaking out; no surprise given that the Fed is buying $85 billion a month in mortgage-backed securities and US Treasuries. The Fed also appears to be now buying roughly 80% of all US Treasury issues. No wonder its balance sheet has ballooned to over $3 trillion.

Since the 2008 financial crisis the Fed has conducted quantitative easing, an unconventional monetary policy used by central banks in an attempt to stimulate the economy when traditional monetary policy has become ineffective.

Since December 2008, we have had QE1, QE2, Operation Twist and QE3. The monetary base grew from $874.8 billion in September 2008 to $2.7 trillion in June 2011. QE3 is ongoing; there is no end date. The Fed will purchase $85 billion a month of US Treasuries and MBS. This past month the monetary base broke out over $2.7 trillion breaking the sideways pattern that had prevailed since September 2011.

Since the QE programs began, gold has gone from $800 in December 2008 to a high of $1,900 in September 2011. With QE3 underway, we could soon see gold at over $2,000.

In January 1980 when gold peaked at $875, its average price for the month was $669. The monetary base in January 1980 was $132.4 billion. It took only 198 million ounces of gold to cover the monetary base. But gold was in a bubble at that time. If the same thing were to occur today, gold would have to be trading at almost $14,000 in order to reach that low coverage. On that basis gold prices have a long way to go before reaching bubble territory. 

Source: goldeagle