Gold Price Ratios And Fed Debt

GOLD PRICE RATIOS

There are two charts below for your observation. We will review each of them in sequence and then provide some commentary and conclusions.

                             Chart No. 1: Fed Balance Sheet vs Gold Price

This chart (source) compares the monthly percentage growth of the Federal Reserve balance sheet (U.S. Treasuries and Agency MBS) against the price of gold back to 2004.

The most visible fact emerging from this chart is the huge growth in the size of the Fed's balance sheet relative to the increase that has occurred in the price of gold.

It is important to note that we cannot tell the actual size of the Fed's balance sheet by looking at the chart. We can see only how much it has grown in percentage terms since 2004.

We cannot tell anything about the actual gold price, either, except how much it has increased in percentage terms.

We do not need to know these two things (most of us already do know them and the information is readily available) however, in order to draw some conclusions.

CONCLUSIONS FOR CHART NO. 1

Since 2004, the size of the Fed's balance sheet has increased by 1200%, which is three times as much as the gold price increase of 400% over that same time period.

That may seem counterintuitive to some, but it is not. There is no correlation between increases in the amount of debt which the Fed chooses to hold on its books and increases in the price of gold. 

If there were a correlation, and the expectation for higher relative gold prices were valid, then something is amiss.

Again, if a comparison between the two items has any validity at all, then a possible inference might be that the expectations for a closer alignment of the gold price relative to Fed debt mean that a collapse in Fed debt growth is just as likely to happen as an increase in the gold price. (see Federal Reserve And Long-Term Debt -- Warning!)

Otherwise, there is no relationship between the two items. The comparison of percentage growth increases in the gold price and increases in Fed debt is rather pointless.

On to Chart No. 2...

                               Chart No. 2: Gold (price) to Monetary Base Ratio

This chart (source) shows the ratio of the gold price to the St. Louis Adjusted Monetary Base back to 1918. The monetary base roughly matches the size of the Federal Reserve balance sheet, which indicates the level of new money creation required to prevent debt deflation. 

("As of September 29, 2021, the Federal Reserve’s balance sheet stood at nearly $8.5 trillion. Securities holdings represented the vast majority of assets, while several liabilities were sizable." (source))

The message in this chart is similar to that which we learned in Chart No. 1.

In this particular chart it is clear that the actual size of the debt created by the Fed is not correlated to higher gold prices. 

For the past century, the ratio comparing the price of gold to the monetary base has declined in startling fashion. There is no apparent reason for that trend to change in any material or lasting way.

CONCLUSION 

If you believe that a higher gold price is inevitable because of the size of the debt or its rapid rate of increase, then here are some words of caution...

The price of gold increases for only one reason: to reflect the accumulated loss in purchasing power of the US dollar. 

If it helps, try thinking of gold as a thermometer. A thermometer doesn't not tell you what the temperature will be tomorrow, or next week, etc. It can only reflect the current environment.

So, too, with gold. The difference is that the gold price is only current on a few specific occasions. Other than that, its price can languish in subdued fashion, or decline, for several years at a time. (also see Predictions For Gold 2022)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED!

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