Gold up 1.8% on week, silver 3.9%; ‘unrestrained liquidity’ seen as prime mover for gold’s bull market

(USAGOLD – 7/10/2020) – Gold is level this morning at $1811 in quiet trading. Silver is also level at $18.80. On the week, surprisingly gold is up 1.8% and silver, 3.9%. We say ‘surprisingly’ because typically the summer months are slow for the precious metals. This summer though has been a different story. Since May 1, gold is up 7% and silver over 25%. There is considerable speculation as to what might be driving investor interest and prices with the rising tide of liquidity increasingly garnering attention as the prime mover for both gold and stocks.

“…[U]nrestrained liquidity is one of the reasons for the rapid rise of stock prices since the March bottom,” writes analyst Clif Droke at Seeking Alpha. JPMorgan’s Nikolaos Panigirtzoglou has observed that a huge liquidity increase-visible in the form of a ‘significant expansion of global M2’ since the beginning of 2020 until late May is ‘similar to the magnitude of M2 creation during the financial crisis of 2008/2009.’ The chief difference being that this time around, the liquidity increase has occurred at a decidedly faster pace. He concluded: ‘But given that debt creation and QE will continue to be stronger than normal until 2021, we believe that the total money or liquidity creation could exceed $15 [trillion] or more globally by the middle of 2021.’ This massive effusion of liquidity is, ironically enough, also a major reason for gold’s bull market.”

Chart of the Day

overlay chart showing gold and the monetary base June 2020

Sources:  ICE Benchmark Administration, St. Louis Federal Reserve [FRED]

Chart note:  “Since the COVID-19 crisis hit,” says UK-based Edison Group’s Charlie Gibson, “the Federal Reserve has returned to bond-buying with a vengeance. After cutting interest rates to (effectively) zero and initially saying it would buy US$700bn in bonds, on 23 March it removed the brakes stating it will ‘purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy’. With the total US monetary base now at US$5.1tn (and given the close historical correlation between the two), the gold price could very reasonably be expected to rise to US$1,892/oz and potentially as high as US$3,000/oz.” The chart above shows the correlation between gold and the monetary base Gibson mentions.

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