Gold level this morning after yesterday’s strong upside and ahead of Powell testimony

(USAGOLD – 2/23/2021) – Gold was level this morning at $1811.50 after yesterday’s strong push to the upside and ahead of Jerome Powell’s Congressional testimony later today. Silver is down 22¢ at $28.02. Commodities, the dollar and bond yields are similarly subdued and in a wait and see mode. The consensus is that the Fed chairman will do his utmost not to upset the easy money applecart.

If the Fed is looking for inflation, it will find it in the money supply – something that did not happen with authority in the aftermath of the 2008 credit crisis. From June 2019, the money supply grew by $4.5 trillion – an eight times factor year over year. Recently, the nominal change in dollar volume resumed its uptrend after about six months of moving sideways. (Please see our Chart of the Day and comments below.)

“Every gold bull market over the last 50 years has begun with a catalyst that propelled significant growth in the money supply,” writes Manning & Napier, the money management firm, in a report posted at Seeking Alpha titled The Value of Gold in a Portfolio. “Each of those prior bull markets was proceeded by substantial US dollar money supply growth, making monetary expansion a key indicator. It is important to note that this alone does not guarantee a gold bull market, as there are many other variables at play. … We see the status of each of these economic factors, money supply growth, inflation, and real interest rates, as supportive of higher gold prices ahead. Policymakers have been remarkably forceful in responding to Covid-19, resulting in substantial recent money supply growth in the US, and they appear willing to continue to throw money at the crisis in the year ahead.”

Chart of the Day

overlay line chart showing explosive growth in the money supply and gold tracking

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

Chart note: During the financial crisis that began in 2008, the Fed sterilized its money creation by routing liquidity back to its coffers in the form of commercial bank excess reserves – a strategy that kept the inflation rate from running out of control. As you can see, the rapid growth in the money supply this time around goes beyond anything that occurred during the prior crisis. Whether or not the growth in the money supply will translate to price inflation down the road remains to be seen – though we have begun to see some signs that it might be taking root, including the strong growth in commodity prices reported in yesterday’s DMR. Also, note that MZM growth has begun to accelerate once again.

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