Why The Gold Rally Depends On U.S Money Base?

 |  About: SPDR Gold Trust ETF (GLD)
by: Lior Cohen

The U.S. Monetary base declined again during June by 0.91%. This news might imply that gold will continue to dwindle during July (assuming the Fed won't introduce another quantitative easing plan). I have already examined in the past the relation between U.S. Monetary base and gold: As the U.S. Monetary base shrinks, the price of gold tends to decline. By extension this could also mean that if the U.S. Monetary base will continue to shrink the price of SPDR Gold Shares (GLD) may also fall.

The minutes of the recent FOMC meeting might reveal something that could suggest the Fed is considering introducing another QE anytime soon. Further, if the upcoming FOMC meeting at the end of July will put the QE program on the table again, this may pull up not only the U.S. money base, but also gold prices. I still speculate the Fed will remain at the sidelines and won't introduce QE3 in the near future.

The following chart presents the changes of gold price (monthly average prices) and U.S. Monetary Base between 2010 and 2012 (up to June). According to the chart, U.S. Monetary base contracted during the past four months which might partially explain the decline in gold price during those months.

Click to enlarge
(Click to enlarge)

Further, the relation between lagged by one month of U.S. money base (monthly percent change) and gold price is positive and mid-strong. Between January 2009 and June 2012 the linear correlation between these two data series reached 0.33. This relation might suggest that if U.S. Monetary base will continue contracting, gold price might not rise.

During May, U.S. money base contracted by 0.92%, while the average gold price edged up by 0.74% during June. Keep in mind that a big part for the recovery of gold came at the end of the month after the EU ministers convened and their resolution pulled all major commodities markets and the Euro sharply up.

During June, U.S money base declined by 0.92%; the interpretation of this news is that, all things being equal (e.g. no surprise from the Fed), and if the relation will hold up, then the average gold price might continue to decline during July.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.