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Guest Commentary: Can We Predict Price of Gold via the U.S. Money Base?

Guest Commentary: Can We Predict Price of Gold via the U.S. Money Base?

Lior Cohen, Energy Analyst for Trading NRG,

I have already referred to the relation between the expansion of U.S. Monetary base and the development of gold. As the U.S. Monetary base expands, the price of gold tends to increase as well.Can we use this relation to learn more on the future development of gold price? See here for more on the relation between gold and US monetary base.

The following chart presents the development of gold and U.S. Monetary Base during 2011. According to the chart, U.S. Monetary base expanded mainly during the first half of the year due to the Fed's second Quantitative Easing Plan.

In fact, the relation between lagged by one period U.S. Monetary base percent change and change in gold is positive and mid-strong. From March 2009 to December 2011 the linear correlation between the two was 0.2798. This relation might suggest that if U.S. Monetary base will continue to expand, gold price might follow the next month and rise.

Guest_Commentary_Can_We_Predict_Price_of_Gold_via_the_U.S._Money_Base_body_Monetary_base.png, Guest Commentary: Can We Predict Price of Gold via the U.S. Money Base?

Another way to look at the relation between the monetary base and gold price is by using the U.S. gold reserves, which currently stands at 8,133.5 tonnes (or 261 million t oz.); by using the gold reserves I can calculate the "gold base price" which is U.S. Monetary base divided by U.S. gold reserves. For the December this rate reached $9,984 per t oz. compared with the actual price of gold, which was $1,644. By dividing the lagged by one period gold base with gold price we get the ratio between the two.

This relation should be taken with a grain of salt, but might offer another perspective on the future development of gold. If the upcoming U.S. Monetary base (for January) will expand again it could suggest gold will continue to rally during February.

For further reading:

Will the Silver and Euro Rally Continue? Are they related?

Did the Liquidity Trap Cause the Rally in Gold Price?

By: Lior Cohen, M.A. in Economics, Commodities Analyst and Blogger at Trading NRG

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