Gold Has More to Run, Whatever the Benchmark

Source: Thomas Tan, Seeking Alpha  (9/26/07)

The most relevant factor in money supply related to gold is M3. If we look at the M3 money stock for the last 30 years, the picture is not pretty at all.

At my last entry on gold, I discussed gold's relationship with CPI. But gold is also related to (if not more) monetary policy and monetary inflation - in other words, the growth of money supply or inflation caused by money supply.

The most relevant factor in money supply related to gold is M3. If we look at the M3 money stock for the last 30 years, the picture is not pretty at all. Basically, M3 has grown from around $1 trillion in 1977 to over $10 trillion today. The US government actually stopped publishing M3 a short while ago. This is probably not for the reason claimed - to save $1M on data compiling - since M3 is one of the most important economic figures published and studied by economists and the financial world. The real reason is probably that M3 has been running out of control, rising exponentially especially during last 10 years, about 12-13% per year recently. Obviously this 12-13% growth on M3 is several times higher than the 2-3% published CPI index.

Gold doesn't tie exactly one on one to M3 (since we are not returning to gold standard as in the early 1970s), and I don't know what the ratio should be, but as we can see, the monetary inflation reflected by M3 is much worse than CPI...

Besides CPI and M3, there are several other indexes people compare with gold. One of them is DJIA vs. Gold, a favorite ratio for Newmont's former President and Vice Chairman, Pierre Lassonde. If we use DJIA to represent paper assets, and gold for hard assets, Mr. Lassonde noticed that in last 100 years, DJIA/Gold has reached between 1-3 five times, so he thinks that sometimes in the future, the ratio could drop back to the same range...

We also know gold was up from a $35 bottom to a $887.5 peak in 1970s, a spectacular 2500% run. I don't expect gold will achieve the same return this time, since the $35 per ounce was a suppressed price then, controlled by the government. I feel the free market price, if it was traded at the time right before the government abandoned the gold standard, is probably around $80-$100 per ounce. If so, the real gold ramp up in those 9 years is around 800%. I hope that we will have a similar return during this gold bull market as well, from $250 to $2,000.

Related Articles

The Gold Report The Gold Report