Monetary Base Vs. Gold Reserves

The following chart shows the U.S. Monetary Base Vs. U.S. gold reserves.

These two should match with each other. Either the price of gold goes up, or the U.S. gold reserves should go up. This is why I include the monetary base in the Gold Forecaster Index, because it is correlated to the gold price. The more the Federal Reserve prints money, the more U.S. gold reserves are needed. The more gold reserves are acquired, the higher the gold price.

Today, the gold price should be at $5000/ounce.

 

Money Supply

This page is created to monitor the Money Supply.

Base money is basically correlated to the Federal Reserve's Balance Sheet (red chart). When base money is increased, the other monetary aggregates (M1 in green, M2 in purple, MZM in blue) will follow suit.

The expansion of the money supply is the very definition of inflation. As long as these charts go up, we will have inflation.

Total base money fiat supply is about 26 trillion.

The money supply is correlated to gold price. 

 

To calculate the fair price of gold we assume that central banks need 20%-40% gold backing. Let's be conservative and use 20% gold backing.

The amount of gold that central banks hold today is $1.304 trillion.

The global base money supply is around $24 trillion today. (There are people who use M1, but I'm conservative and use base money M0)

To back this money supply by 20%, we need $24 trillion x 20% = $4.8 trillion.
This means that gold will need to rise in price from $1.304 trillion to $4.8 trillion.
Or 4.8/1.304 = 3.7 times.

This gives a fair gold price of 3.7 * $1800/ounce = $6660/ounce

Another way to evaluate the gold price is by looking at the currency in circulation. The gold on the balance sheet of the Federal Reserve should be valued 1:1 to the currency in circulation.

The gold certificates on the Fed balance sheet equal $11 billion valued at $42.22 per fine troy ounce.

Currency in circulation is $2 trillion. To get to $2 trillion, gold would need to be revalued to $8000/ounce. $11000000000/42*8000 = $2 trillion.