I've added the Monetary Base (M0) to the charts. While the M1 and M2 charts show that the gold price has been increasing faster than the money supply, the opposite is shown in the monetary base, which has grown almost 4 times as fast as the gold price since the early 1980s. The Fed has been using the monetary base to execute two QE programs, purchasing well over two trillion dollars worth of MBS, ABS, and treasury bonds. Most of that new cash has ended up back at the Fed in the form of excess reserves, paying 0.25% interest to the banks that keep it there. If there was demand for that money as bank loans in the economy, it could create at least 18 trillion new dollars. Of course, there aren't a lot of credit worthy borrowers who want to take out new loans, and the banks need provisions for ongoing real estate loan losses. That inert money is likely to stay at the Fed until the real economy starts to improve, but the monetary base level is unusual and disturbing.
Nice charts, Thanks.
ReplyDeleteHey GYSC,
ReplyDeleteI properly cropped them. M0 has gone wild!
At $1640 an ounce, there has been $4 trillion of gold mined since 1971. You might wish to factor that in to your charts.
ReplyDeleteIn other words, it isn't quite as bad as your charts imply.
Stagflationary Mark,
ReplyDeleteI see a lot of gold has been mined since 1971. How much of that mined gold was added to US stockpiles? I think zero. US government gold has been flat since 1971. Meanwhile, US government money supply has mushroomed. It would make sense to compare total above ground gold vs. total money supply from all countries, but that data is very hard to get.
BTW, I think the only chart that implies something bad is happening is M0. Gold has gained on M1 and M2 and is approaching the cautionary ratios of 1980.
How much of that mined gold was added to US stockpiles? I think zero.
ReplyDeleteI once stockpiled. You stockpiled. Others stockpile. I can't say it was $4 trillion (because the U.S. was not the only place stockpiling as you point out), but it was certainly not zero. Whether the government stockpiles or we stockpile individually is irrelevant to me.
You see gold as money. I see it as another metal like aluminum. Aluminum prices are set by world production, world consumption, U.S. dollar production, and U.S. credit production (and/or destruction).
In order to make sense of aluminum prices, all 4 of those things must be taken into consideration. I simply claim that it is also true of gold.
Stagflationary Mark,
ReplyDeleteI think I see your angle. But since both dollars and gold are subject the global supply/demand, the quantity of gold mined should already be reflected in the price. The supply increased and the demand fluctuated based on people like you and I hoarding and dis-hoarding. Maybe I should try a quantity vs. quantity instead of quantity vs. price. Will think on it.
The supply increased and the demand fluctuated based on people like you and I hoarding and dis-hoarding.
ReplyDeleteIndeed. That's clearly a very important factor as was seen in the housing market recently (and the gold market in 1980).
Maybe I should try a quantity vs. quantity instead of quantity vs. price.
The effect is/was much more pronounced with aluminum. We've been mining the heck out of that element mainly because the demand was so huge. A few centuries ago we didn't even know aluminum existed. Now we rely on it.
The risk for gold bugs is that the gold demand has been huge, the price reflects at least some of that huge demand, and it is uncertain how much we will be able to mine it. I would argue that if there is serious money to be made in producing gold, then people will think up even more creative ways to mine it (or at the very least allocate a billion Chinese to mine it by hand). Just a thought.
As seen in the gold link I provided in an earlier comment, note that world gold production rose 7% from 2008 to 2009.
ReplyDeleteIt could be a statistical blip that is only temporarily deviating from the recent downward trend or it could be the start of a new mining trend brought on by higher gold prices.
As seen in the gold link I provided in an earlier comment, note that world gold production rose 7% from 2008 to 2009.
ReplyDeleteAre we looking at the same page? The gold price started rising every year since 2001, which happened to be the peak of gold production so far. Gold production dropped 6 of the 8 years since 2001. With the 7% increase from 2008 to 2009, it is still 5.7% below peak production in 2001.
It seems that with the gold price 5 times what it was in 2001, we might see 5 times the production, but instead we are still below 2001 production levels. Whether 2001 was a permanent peak or now, we'll have to wait and see.
One thing is for sure, it is easier and less expensive to produce one trillion dollars than one ounce of gold.
Are we looking at the same page? The gold price started rising every year since 2001, which happened to be the peak of gold production so far. Gold production dropped 6 of the 8 years since 2001. With the 7% increase from 2008 to 2009, it is still 5.7% below peak production in 2001.
ReplyDeleteYes, we're looking at the same page. I said...
It could be a statistical blip that is only temporarily deviating from the recent downward trend or it could be the start of a new mining trend brought on by higher gold prices.
One thing is for sure, it is easier and less expensive to produce one trillion dollars than one ounce of gold.
ReplyDeleteI would disagree.
Apple produced $14 billion in profits in the year ending Sept 25, 2010.
Newmont mining produced 6.451 million ounces of gold in 2010.
This is the interesting part to me.
It would seem that Apple cranked out about $2170 per each ounce of gold that Newmont mining cranked out.
Here's where it gets even more interesting to me.
By market cap, Newmont mining is only worth about 10% of what Apple is worth ($31 billion vs. $365 billion).
With Apple and Newmont mining, both companies actually produced wealth, and earned dollars. They did not create any dollars. As you know, dollars are created with accounting entries at banks when a loan is made, or when the Fed credits an account in their computers like they did with QE1 and QE2.
ReplyDeleteProductive companies don't create dollars, only banks, and the process entails typing on a computer keyboard. That process, whether for $1 or $1 trillion is much easier than digging gold out of the ground.
On gold production, I missed your downtrend comment. My bad.