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Global Outlook

Monetary Base Shows Gold Poised To Blast Off $GLD

March 18, 2013, Monday, 16:29 GMT | 12:29 EST | 20:59 IST | 23:29 SGT
Contributed by eResearch

Gold rose to a new two-week high in early U.S. trading Wednesday (March 13) amid rising expectations of additional central bank stimulus. The yellow metal got a further boost from a bigger-than-expected rise in U.S. import prices, which jumped 1.1% in February.

The rise in import prices was the largest in six months, driven by rising petroleum prices. Prices were unchanged in February ex-petroleum. Nonetheless, with the Fed pumping $85 billion in new money into the system each and every month, there are many investors looking for any signs of inflation. Gold, of course, is the classic hedge against price risks.

In USAGOLD's latest newsletter, Michael J. Kosares notes how gold correlates to the monetary base, pointing out the sharp 8% rise in base money since the beginning of the year, courtesy of the Fed's QE4 program.

Kosares: "Gold, as the chart illustrates, closely tracks but lags the monetary base. If nothing else, the extensive and on-going creation of money (whether or not it translates to double-digit price inflation) suggests that the Federal Reserve remains in crisis mode, and that there might be volcanic risks in the banking and credit system rumbling just below the surface."


Pay particular attention to that "lag," as gold has yet to react to the latest surge in the monetary base. With the low end of the year-plus range holding, the yellow metal may be staging for its next run at the upside.


Beyond easy monetary policy, central bank demand for gold is another key underpinning for the market. The World Gold Council released a report today (March 14) that highlights some interesting shifts in central banks reserves.


WGC: "The official reserves of global central banks have grown from $2 trillion in 2000 to more than $12 trillion in 2012. During this same twelve-year period, the data shows significant shifts away from the U.S. dollar, while the share of "other" currencies in reserve composition has tripled in absolute terms since 2008."

Of particular interest is the ongoing move out of dollars and the increased appetite for gold. In February, the WGC reported that central banks added 534.6 tonnes of gold to reserves in 2012, the most since 1964.

In the latest report, Ashish Bhatia, Manager for Government Affairs at the World Gold Council, makes a couple of key observations about gold:

"Building gold reserves in tandem with new alternatives is an optimal strategy as central banks remain underallocated to gold, and many attractive alternatives are either too small or, as is the case with the renminbi, not yet open to broader international participation.

"Gold has a deep and liquid market with no credit risk, making it one of the most attractive assets for central banks to consider as they diversify away from the U.S. dollar and euro. Gold's tail-risk hedging properties add to its appeal as a particularly valuable component of a diversified reserve portfolio."


The individual investor, too, is arguably under-allocated to gold, and could greatly benefit from diversification into the yellow metal. The same motivators behind the central banks' moves to diversify out of dollars and into gold are equally applicable to those of individual investors.


The market has found support at the $1685 level over the last three days. If the market gains acceptance below that $1685 level, it may trade lower back into Thursday’s morning balance range of $1670 to $1674.


If the market begins to gain acceptance above the three-day value-range, the first reference to watch for is Thursday's $1687.80 high. The market may find resistance at this level the first time up. If the market gains acceptance above Thursday's $1687.80 high, it may test the $1703.70 to $1708.50 gap.