Ann: RIU Presentation - February 2013 , page-19

“I recently saw a very good graph which plotted the POG and the money supply. The relationship was unbelievably close and the money supply is not contracting”

Hi Smartdude.
I posted this on the ABU thread over the w/e on the subject of gold price and it included a chart on monetary base and the POG showing that close correlation since the GFC.
As you say with QE3 beginning last month, money supply is not just “not contracting” but it is about to be expanded aggressively again after a pause since QE2 ended.
The chart also shows the monetary base was increasing long before QE1 or the GFC and that the POG lagged that increase in the monetary base since 1980. More discussion on that below.
I think we are getting close to a reversal from this correction but my thoughts below are more to do with my long term view on POG.

We are still well within the now near 1.5 year trading range between $1525 and $1800.
Near term support might be now found at the bottom of the down trend channel at just under 1600, just below current price of 1609.
One more day might get us there but it might bounce and close back up above $1600 by the end of that day.
This is now a big leg down so when the low occurs it could be followed by a significant bounce.

Gold has a very strong correlation to the monetary base as shown in the second chart below.
I know I’ve shown it before but it looks like a very important chart and probably our best chart guidance IMO.
QE3 will now result in a new strong leg up in the monetary base.
The POG might be lagging but since 2008 the correlation is strong.
While nothing is ever certain, if we know monetary base is now increasing strongly, I think that is our best guide for where the POG will be heading over the next year.
POG dropped on the back of weak GDP numbers out of Europe (suggesting further printing will be needed) and prior to that after Japan committed to further money printing.
It seems that every time there is gold bullish news, the POG gets pushed down.
I recently read something that might help explain why;
One of the central banks main objectives is to "manage inflation expectations".
All this money printing is helping to calm fears about deflation but they also need to manage fears of high inflation that will probably result from all the printing- sooner or later.
A surge in POG after inflationary news would add to those inflation fears so it would not be surprising if the central banks sell gold every time there is inflationary news.
If the market has recognized the pattern, they will probably also sell so the market ends up doing much of the work for the central banks.
(Despite this potential “management” of the gold price at strategic times (more likely only by Western central banks), central banks are net buyers overall.)

In 1970 the price of gold was $35. By 1975 it reached over $180.
The rise was a multiple of over 5 times in just 5 years.
That rapid rise led to a strong correction of over 40% which lasted for around 1.5 - 2 years which must have looked very much like the end of the bull market at the time.
However, the chart and price movement was deceptive in determining if the bull market was over.
The price was clearly trending down, all up trend lines were broken, moving averages would have been breached, etc. (see chart below).
By 1976 any bounce probably would have looked more like a shorting opportunity or dead cat bounce.
However, instead of the bull market being over, it was just getting set for an even larger move over an even shorter period of time.
From the near $100 low, it rallied to peak at $800. From the $35 start, the price rose by a factor of 22 times.

After the 1980 peak, the price settled into a band between $300-500 and for 16 years the price averaged just under $400.
There was a short period around 2000 when the price bottomed near $260. This was at the time that the USD was very strong as a result of external currency crises and large inflows into US stock markets as well as a temporary federal budget surplus.
I prefer to use the $400 as a base for the current bull market as it gives a more realistic market price than using a shorter term spike down in 2000 or the 1980 spike high.
$400 was established over a lengthy period.
Using the $400 average price post the 1980 highs, the price has risen by a factor of just 4 in over 30 years despite the US monetary base rising by a factor of 13 over the same period (chart below).
Despite the much more rapid recent rise over the last 10 years, it is actually quite extraordinary that gold has not increased by more than a factor of 4 over the 30 year period (compare to price rises in houses, cars, electricity, oil etc).
Should we believe the current weakness in POG suggests the bull market is over, or is it setting up for an even larger move as it was in 1976?
The very large rise in the US monetary base since 1980 suggests to me we still are no where near the end of the bull market for gold.
POG might go lower still short term despite this correction now getting fairly lengthy, especially if it is being “managed”, but as we saw in 1976, it can also rise from here by multiples.
A catch up to the rise in monetary base would suggest upside potential is measured in multiples.
13 times up side from $400 (in line with monetary base increase since 1980) gives a theoretical target of $5,200 (3 times the current price and a much more modest rise than the factor of 8 rise in the 1976-1980 final up leg).
Of course that target assumes no further increase in the monetary base but QE3 tells us there will be another strong increase as do the federal deficits and lack of any austerity.