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Introduction
This article is a follow-up supplement to my last writing 3 weeks ago.
The international US-led pure fiat monetary system has been in place since 1971. The system can work well if the base narrow money supply grows slowly, like the 2% consumer price inflation target. But the narrow money supply of base currency and treasuries grew at an average of 8% for 16 years. Asset price inflation such as stocks is the main beneficiary, because of the expansion of treasuries as the liability of taxpayers. A re-examination of the monetary structure is suggested below, with gold staying as the highest form of money according to central banks.
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The US fiat narrow money of currency and treasuries, the liability of the Fed and the Treasury, are unique and different. The bank money and credits are derivatives of the narrow money.
Internationally, other than in the G7 West, many central banks and treasuries have the same department, which is liable for base money and sovereign debt.
The narrow money supplies mostly affect the economy, while liquidity exerts more influence on the daily fluctuation of asset prices.
Treasuries and gold
The total national debt includes outstanding treasuries and new issuances for growth. The following diagram shows the need for discipline in expanding the narrow money supply, as quantity and quality are inverses of each other.
The fiat monetary conservation with gold equation involves the narrow money supply M and the dollar value relative to gold or 1/gold. The two dissimilar factors compromise each other, as physical gold provides discipline.
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The fast changes of the past years promote the status of treasuries as narrow money, out sizing the base money (M0) of the Fed by 15-fold. The growth of treasuries approximates narrow money, the growth becomes the same as the gold price in theory, as illustrated above.
The national debt growth rate of treasuries is about $3 trillion annually, which adds to the $35 trillion, or about 8%. The $3 trillion roughly equals the sum of fiscal and trade deficits.
The chart below plots the narrow money expansion against the dollar value relative to gold. To demonstrate the conservation of fiat money over time. Ideally, the lavender curve of M * D stays close to one. The Ukraine War and the coordinated moves of the Fed and Treasury caused the curve to peak in 12/2022. The self-adjustment corrected itself to the equilibrium for 18 months, as proof that excess money expansion will diminish its quality relative to gold. Gold also rises about 8% annually according to narrow money expansion in the same period.
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The dollar index and gold
Gold is a passive asset that also reacts to the daily changes in the dollar index.
The dollar index moves relative to other currencies. Each currency drifts up or down according to the fiscal and trade deficits of the country. But the dollar has been the currency leader for all others since 1944, geopolitical events play a significant role for a strong dollar besides the twin deficits.
The chart below shows the strength of the dollar index UUP in a light blue curve after the start of the Ukraine War and the hawkish moves by the Fed. The strong dollar persists until today but is showing signs of weakening.
The dark gold curve represents the real and international price of gold, GLD*UUP. Since gold price in the gold color curve moves inversely with the dollar index, a weakening dollar can cause gold to rise, as happened in 06/2020. The light green curve of GLD/UUP amplifies the changes of the weakening dollar. The gold curve should stay between the other two curves. The chart is a tool to observe the relations between gold and the dollar index.
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Since 02/2022, the dollar index has risen despite high twin deficits. The UUP divided by the past money curve in pink peaked on 11/2020. This curve declined since 02/2024 when gold moved up strongly. The other half of the past money, commodities, just drifted.
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The chart below shows the daily quantitative modeling of the gold price. The model worked well previously but began to diverge with gold prices 2 years ago. The problem was solved by multiplying a narrow money expansion factor in pink for the last two years, as indicated by a much higher correlation between the gold basic composite in lavender and gold. The narrow money expansion factor is vitally important as an external driver behind the other daily internal components that affect the gold price. The relative value of the dollar is falling against record gold prices.
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Recent stock market developments
The updates to the new development are below. All the factors are reinforcing to result in the lowering of risk-on asset prices.
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Gold and miners
According to seasonality, the potential for more gains is favorable until mid-September.
Earnings improvements for the miners should be favorable because of the best quarterly gold price increase in the past 2 years.
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Conclusion
The growth rates for gold and national debt are the same, at about 8%. As the expansion of treasuries continues with no limit, so will gold prices.
The deep-rooted reason is the pegging of fiat money to gold for the past three hundred years, even though the peg was disrupted unilaterally by the US in 1971, other central banks hold gold as the foundation of their monetary system.
Fluctuations in the dollar index are inversely two-fold with gold prices. Prolonged weakness in the dollar index can cause large deviations in gold prices from the running average.
The narrow money expansion factor can improve the daily modeling of the gold price.
This article is for discussion only and is not intended for investment advice.
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