Thursday, March 16, 2006

 

Gold And Money Supply Measures

TheStreet.com looks at gold and the Fed. "Gold closed higher on Thursday despite a CPI report and other data that convinced many inflation is not a problem and the Federal Reserve will stop raising interest rates sooner than later. But gold, which serves as a hedge against inflation, still found cause to rally. First, the dollar took a hit after the CPI. The Fed's 20-month-long campaign to raise rates has provided key support to the greenback."

"Second, crude oil prices, which gold has been tracking recently, jumped $1.41, or 2.3%, to $63.58 per barrel after the U.S. launched its biggest air attack in Iraq in three years. The result: Gold for April delivery gained $1 to $555.40 per ounce, marking its fourth straight session of upside for a total gain of $14.10."

"The metal's advance didn't do much for gold mining stocks, which have remained depressed since gold took a corrective turn in February. The CBOE Gold Index dropped 0.7% and the Philadelphia Gold and Silver Index fell 0.8%."

"There's more to the story behind gold's resilience than apparently tame inflation. Gold bugs love a good conspiracy theory and they actually have a fairly convincing one. The CPI, many gold bugs believe, is not to be trusted. A real gauge of inflation, they argue, is M3, which is the largest measure of the money supply. And guess what? That weekly measure, which used to rock the bond and stock markets in the 1970s, is about to be scrapped on March 23."

'The explanation on the Fed's Web site reads: 'M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.'"

"If you ask gold bugs, however, the Fed is trying to hide something. M3 includes the smaller measures of the money supply such as M1 and M2 plus large time deposits, institutional money market accounts, and Eurodollar deposits of U.S. banks held at foreign branches and at all U.S. offices. While the first two measures are mostly held by the public, M3 is about putting 'money into the system,' writes David Chapman, director of the Millennium Bullion Fund."

"'The Fed has been running a well managed hyperinflationary environment,' says John Strafford, a gold analyst and editor of The Strafford Newsletter. 'They must inflate or die.'"

"Iran was expected to launch an exchange next week to start trading it oil in euros instead of dollars. Given current geopolitical tensions, a possible huge rush out of dollars would occur, and that would have hit M3 the most. A sharp drop in M3 has typically been seen as presaging recession, and markets would have panicked, says Chapman."

"Meanwhile, it seems that Iran's launch of the bourse has been delayed until April, according to Platt's Commodity News."

"According to John Lonski, chief economist at Moody's and a veteran Fed watcher, the Fed is not trying to hide something. 'M3 is less relevant now than it was in the 1970s, given thin evidence that monetary growth is correlated to inflation nowadays,' he says."

"Moreover, as long as most market participants believe there's no inflation, then there's little to worry about, as prices don't get out of hand. 'Perceptions matter a great deal,' Lonski says."

"But gold bugs, who believe that the U.S. economic imbalances such as the swelling current account deficit are not reflected in the current value of the dollar, will continue to believe in the precious metal's upside."

Comments:
Can someone help me understand why the xau and hui are down with the strength in the spot and futures price of the metals?? Were the stocks THAT overbought in february. I know its just one day, but trying to undertand all the forces...
 
Well, the CPI is also a poor gauge of inflation (being that it doesn't include essential costs-of-living like energy and real estate) and we're not retiring that metric any time soon.

But this is my favorite part:

'M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.'

So the decision to cease publishing the M3 is based on a cost benefit analysis!? That may be the (cough!) lamest excuse I've ever heard. Exactly when did our government start being this frugal?

And given "helicopter" Ben's admitted proclivity for firing up the printing presses to solve debt problems shouldn't now be *exactly* the time to focus on M3?

Something stinks.
 
reporting on inflation in the press gets my blood boiling more than reporting on the housing bubble.
 
'M3 is less relevant now than it was in the 1970s, given thin evidence that monetary growth is correlated to inflation nowadays,' he says."

Geeze, and I thought that monetary growth was the exact reason for inflation. What was I thinking?
 
Republican Ron Paul is trying to pass a bill to continue the M3 report.
Source
 
Isn't amazing how everyone just accepts government reports at face value?? If there's anything I've learned in the past few years, it's how much our government lies to us and how willingly the media plays along.

Our founding fathers wouldn't recognize their country. The Constitution & Bill of Rights were designed to prevent us from getting exactly the kind of government we now have.

That said, isn't it great how Gold openly mocks political institutions and their currencies??
 
Further proof that a massive dollar crisis looms is evident in the fact that the other remaining "fall guy" at the Fed (Greenspan of course, held the lion's share of culpability) just resigned with 8 years left on his term. (!)

http://msnbc.msn.com/id/11499654/

Roger Ferguson, who just quit unexpectedly, was head of "crisis management" at the Fed. And of course he won't be attending the March 27th Fed meeting, which (it just so happens) is the meeting at which M3 will be retired.

If there were any doubts that Greenspan ducked-out just prior to a major financial meltdown, they are now erased. Bernanke it seems, is the proud captain of the Titanic. Those responsible for the crisis, and those forthcoming 'desperate solutions' are now conveniently "pursuing other interests".

As of February this year, the US is in technical default of its debts for the first time in its history (!). Social Security is collapsing. The housing bubble is bursting. The Fannie/Freddie scandal hasn't even begun to unfold yet. And US debt monetization is about to go into full swing.

The sky is getting very, very dark.

Who will be the big loser here? The little guy, of course.

Plus de change...
 
Isn't amazing how everyone just accepts government reports at face value?? If there's anything I've learned in the past few years, it's how much our government lies to us and how willingly the media plays along.

Well, we children of the sixties aren't exactly astonished...
 
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