The BASE Indicator And Gold

Includes: GLD, UGL
by: Bruce Pile

Another of the indicators that suggest the gold consolidation of over a year is close to an end with the next major move up nearing is the BASE indicator. This is the correlation between the Fed's printed money base and the price of gold. The other indicators I have pointed out, the silver shake-out progression, and the platinum switch to leadership both concur with how the monetary base is now acting.

The government calculates a money supply they call the "monetary base" or simply BASE. It is the most liquid formulation of money supply and is all currency and coinage in circulation outside of the Federal Reserve banks and Treasury along with the deposits of some institutions held at Federal Reserve banks. This monetary base or "MB" money supply is "central bank money" and is the best measure of the money that is actually out there chasing goods and services. It is more narrow than M1 or M2, which include long term deposits and other money tied up and not in service. It is this level of money supply that has the most direct and immediate impact on the economy and is of the most concern to monetary policy makers. It is also the money figure of most concern to all who view gold as an alternative currency that can not be debased. It has such a close relation to demand for gold, it can be thought of as an indicator for the gold price direction.

(click to enlarge)

This update of the St. Louis Federal Reserve bank's tabulation of this money supply shows an important breakout is happening. The economy is recovering, but at a fragile, sub-par, worrisome pace. So the Fed is back to money "priming", "printing", "conscientious counterfeiting" or whatever you want to call it.

There is a definite correlation between these efforts and the price of gold as the above history shows. And I'm pretty sure the efforts will go on despite all objections. Even on CNBC, an apologist for whatever the Fed does, I heard a guest discussing the well behaved stock market lately by saying that Ben Bernanke is "pushing" all of us into the stock market. Pay no attention to the man behind the curtain. I marvel at the recent announcement by the Fed that QE will be done "until unemployment is satisfactory" despite previous QE programs helping mainly Wall Street over Main Street. This sounds to me a little like the coffee mug that reads "The beatings will continue until morale improves". The average, tax paying, hard working guy is the one getting mugged.

Be that as it may, as investors, we will perhaps have a nice market environment - especially for gold. The above chart shows that gold has gone into its big climbs as a reaction to the big break-away moves in the monetary base. We are having such a breakout now. This makes sense when you consider that Jim Sinclair, one of the most accurate gold predictors ever, teaches that gold's main job is to balance the books between itself and all the other things we call money. So when our circulated monetary base makes a significant move, the value of all gold held wants to adjust accordingly. With the annual amount of newly mined gold supply being only around 1% or 2% of all above ground gold, the price of gold has a strong tendency to try to keep pace with any big move in BASE. Sinclair used this basic principle of book balancing to call the price level that gold went to in 1980. As J.P. Morgan once said, "Gold is money. Everything else is credit".

The monetary base consolidation that is now breaking coincides with the long gold price consolidation still going on. The major moves of the money base lead gold by many weeks. Gold doesn't anticipate what the bankers do, it seems to wait in disbelief for a time before reacting appropriately.

There is an important parallel between these two long consolidations in BASE and gold that one should consider. First, for gold, the sideways price behavior nearing the 1 1/2 year mark has been a trading channel between the mid $1500s and the high $1700s with any prices outside these levels quickly reverting to the range. And this is now the biggest range that gold has been trapped in since the beginning of its bull market. Jim Sinclair predicted this exact development back in July of 2011, before gold got anywhere near this range. In an interview with King World News July 15, 2011 he stated:

"Gold at $1,764 is as important as gold at $524.90, and above $524.90 the gold market went into a runaway. It's the exact same setup at $1,764, but having said that $1,764 should bring in some significant supply.

However, a move above $1,764 would be the equivalent of $524.90 in the sense that you would go from the runaway that was born at $524.90, into a hyperbolic market. The key to all of this is $1,764 and you will go above that level, but what that does is lock in five figures on the price of gold. A move above $1,764 brings into focus prices as high as $12,000, so we are approaching the most critical milestone in the entire gold bull market."

And he predicted that this "most critical milestone" would be accompanied by the biggest resistance roadblock as well:

"It will be reasonable to assume that every effort will be made not to allow gold to get through that price. When it gets through that level gold will start jumping $100 to $200 a day. $1,764 should put up the biggest battle of the entire bull market. The number where confidence is lost is $1,764"

So he correctly outlined gold's behavior in advance. Now let's consider something tied to this last comment of his - "The number where confidence is lost is $1764". This leads us to the second of the parallel consolidations, the long pause in money base creation shown in the above graph. Up through this pause, the approach by the bankers has been implementing "QE I", hoping that would suffice, then the need for "QE II", as if it would fix everything. But over the course of the last 1 1/2 years, this ideal has morphed into "QE until it's all fixed". Sinclair calls this post $1764 world a condition where "the emperor has no clothes". It's interesting that this "emperor has no clothes" milestone of Sinclair's is occurring at the same time as the "QE to infinity" and "beatings will continue" mindset of the bankers is setting in. What a coincidence.

If Sinclair is right, and he is almost unerring (I'm not sure he's human) then the next few weeks and months will be a historic buying opportunity for gold and silver, not to mention platinum. The overall stock market may be fine as well, with monetary help. Contrary to popular opinion, you don't have to bet on either gold or the stock market. The blistering gold move in 1978 to 1980 was during a very calm, uneventful stock market. The Dow Transports were actually up about 40% over that time.

Disclosure: I am long UGL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.