The Price of Gold and the Growth of the Money Supply

We have seen comparisons of the price of gold to the adjusted monetary base and to M1. Based on intense study and reasoning about the current trends in money supply we are convinced that this comparison of growth in MZM with a lag to the change in the price of gold is significantly much more valid than any other we have been able to produce, if one only considers the correlation of the graphs. And it makes logical sense.

MZM is the most valid measure of broad 'liquid' money in the system. We formerly used M3 but this has not been available, with any published certainty, since 2006.

It would make sense that in a free market, the growth trend of a broad measure of 'liquid money,' as opposed to credit or potential money, would be statistically valid with the price of an alternative currency, or wealth asset, like gold over the longer term.



Speaking wonkishly, our preferred comparison would be to be able to measure the difference in growth between real GDP and the growth in broad money supply, and then trend and compare that with the growth in the price of gold.

Since we have no honest measure of price inflation that task is difficult. Our second preference would be to make a similar comparison per capita the economically active rather than real GDP. Is there an accurate measure of job population growth fluctuations with the ebb and flow of the illegals? We are not sure, but are looking into it.

Goldman Sachs Says the Banks Now Need At Least $4 Trillion in Bailouts

Can we get an estimate that assumes we nationalize Goldman Sachs, Morgan Stanley, Citigroup, and J.P. Morgan, place them in receivership, selectively default on their derivatives, sell all their assets, and criminally prosecute their executive management from the year 2000 under the RICO statutes?

Reuters
Bank Bailout Could Cost Up to $4 Trillion: Economists
29 Jan 2009 04:35 PM

The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets.

The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.

Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.

"Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.

Obama and his economic advisers are expected to lay out their policy plan as early as next week. One idea that seems to be gaining traction is setting up an entity to buy troubled assets and hold them until they mature or resell them.

The hope is that once banks get rid of those bad loans, they can attract private investors, get back to the business of lending, and help revive the economy.

Vice President Joe Biden said Thursday that Treasury Secretary Timothy Geithner was considering all options to restart normal lending, but that no decisions had been made.

Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included. (How much would it cost if we put Goldman and Morgan Stanley into receivership - Jesse)

New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry.

The Wall Street Journal said government officials had discussed spending $1 trillion to $2 trillion to help restore banks to health, citing people familiar with the matter.

At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand.

Depending on how the plan is structured, the government may not have to put up the full amount, and since the majority of people are still paying their mortgages and credit card bills, there is a reasonable expectation that taxpayers would recoup a substantial portion of the cost.

However, the potential loss is huge, and if more public money is needed to boost capital even after the bad assets are removed, the total would undoubtedly climb.

The International Monetary Fund said Wednesday that worldwide losses on U.S.-originated loans may hit $2.2 trillion, well above its October estimate of $1.4 trillion. It said banks in the United States, Europe and elsewhere probably needed to raise $500 billion to cover losses coming this year and next.

Cutting Out a Zero

For U.S. lawmakers who are already taking grief from voters over a $700 billion bailout approved last fall, passing another big spending measure carries significant political risk.

At the same time, Obama's team wants to take action that is bold enough to fix the problem once and for all, hoping to avoid the sort of ad hoc approach that has been criticized for adding to investor uncertainty.

Time is not on Obama's side. The more the economy weakens, the longer the list of potentially dodgy debt grows. That is why he faces enormous pressure from Wall Street to act fast.

The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total.

Spending $400 billion would certainly be more palatable to Congress than $4 trillion. It may not even require that much additional funding. Economists estimate that perhaps $250 billion of what remains in the $700 billion bailout fund could be devoted to the "bad bank."

That money could buy bad assets, which would then be repackaged and sold to investors to raise more money which could then by recycled to buy more assets.

Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses.

"If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said.

US 4Q '08 GDP Advance Number Out Tomorrow Morning

The US will release its Advanced Estimate of GDP for the fourth quarter of 2008 tomorrow morning at 8:30 AM.

The consensus of economists is for -5.4% which is a quarter number, non-annualized to put this into comparison with other countries which annualize their numbers.

A low end print of -6.0% is the whisper with the "Yikes!" number at -7.0%

It is thought by some that the Obama Administration release a conservative advance estimate to help shock the Senate into acting on their stimulus package. Who can tell about such things?

Keep an eye on the Chain Deflator which is estimated to come in at 0.6%.

In addition to GDP, the Chicago PMI and Revised Michigan Sentiment for January will also be released at 9:45 and 9:55 respectively.

When the Incoming Tide Turns to Tsunami

Not a matter of if, but when.

The Times
Gold price could treble if China divests dollars, warns mining boss
Jenny Booth
January 29, 2009

The gold price is likely to hit record highs in dollar terms as fears grow about the stability of the US currency, the chairman of Barrick Gold said today at the World Economic Forum (WEF) in Davos.

The founder of the world’s largest goldmining company said that there was even a possibility that central banks, including China’s, might start to switch from dollar holdings to gold, which could cause the price of the metal to treble.

“Gold is at record levels in every currency except dollars," Peter Munk told Reuters at the WEF meeting.

"Even within dollar terms it is within a few percentage points of an all-time high, at a time when all the other major commodities are falling.”

Mr Munk said: “Whether it’s the currency effect or a reaction to a feeling of uncertainty, gold, in my opinion, is more likely to go up than down.”

The gold price was up today, trading at about $890 at 1500GM. At present the record high is $1,030.80 an ounce, achieved in March last year.

Mr Munk emphasised that he was merely weighing the odds.

“It would be stupid to assume commodities prices can only go one way,” he said, adding that physical demand for gold jewellery was not high during the economic downturn.

Gold has been one of the best-performing assets of recent months, rising in value by nearly 17 per cent since late October even as the price of other commodities, such as oil and copper, has dropped sharply. (This is because gold is more monetary than commodity. Silver is a more even mix but it is still monetary as well as industrial. - Jesse)

Investors have bought heavily into physical bullion in the form of coins and bars, and physically backed assets, such as exchange-traded funds, as a safe store of value at a time of increased volatility in other asset prices.

Mr Munk said that downward pressure on the dollar, partly due to massive US spending and printing money to stimulate the economy, would increase gold’s attractions as an investment even further.

Gold usually moves in the opposite direction to the dollar, as it is often bought as a hedge against weakness in the US currency. (Gold has been moving with the dollar as foreigner flee out of other currencies and begin to treat gold as a safe haven alternative with, not in lieu of, the dollar - Jesse)

“My personal feeling is that with the rescue packages calling for trillions, not billions ... the value of the [US] currency has to go down,” Mr Munk said.

He said that there was a possibility that central banks, including that of China, a major dollar asset holder, might start buying gold. (Rumour is that the physical market is so tight they have been calling quietly around looking to lock in major sources of supply - Jesse)

“If they decide to diversify, we assume into gold, then we start to talk about a trebling or quadrupling of the gold price," he said. "It could be followed by Russia or Kuwait." (They could just be jawboning Tim Geithner back with a credible threat as well - Jesse)

“I don’t think it’s likely, but it’s more likely. I would not have said it two years ago — I’m not a gold bug — but it’s more likely than it was two years ago.”

He added that his company did not now hedge its output — meaning use derivatives to insure against a fall in price — and relied on the price climbing.

In the past its successful hedging allowed it to make key acquisitions.

“It would be dumb to hedge,” Mr Munk said. (Bill Murphy told you that when gold was at $300 per ounce, and he was right - Jesse)