Money Explodes; Gold Glitters; The Recovery Slows – Forbes

03 April 2020, North Rhine-Westphalia, Cologne: Jewellery is presented in the shop window of a ... [+] goldsmith's studio together with toilet paper for decoration. Photo: Henning Kaiser/dpa (Photo by Henning Kaiser/picture alliance via Getty Images)

I often get asked why the price of gold is rising, and, as a follow on, will it continue.The price of gold has always had a significant correlation (80%) with the Feds balance sheet (i.e., the money supply), especially during periods of significant balance sheet expansion (money printing).The table shows the Y/Y change in the money supply of the western worlds major economies.The U.S., clearly the largest western economy, has increased its money supply at a much faster pace than any of the other majors.Note that the EU, the only western economy that approaches the size of the U.S., is growing its money stock at less than 40% of the pace of the U.S. Federal Reserve (Fed).

Year over Year Money Supply

Noteworthy is the fact that the value of all of these countries currencies have risen since the virus outbreak as the U.S. money supply has exploded and the U.S. Congress has sent helicopter money to the U.S. populous.In fact, at the time of this writing, the U.S. Congress is in the time honored process of having the two major political parties posture on how the opposition party doesnt care about the American people etc. etc.This, of course, is a prelude to what will be another multi-trillion stimulus package.The CARES Act stimulus amounted to about $2 trillion, and its a pretty sure bet that the upcoming one will be in the same area.Thats $4 trillion total, bigger than the entire GDPs of most of the western worlds economies (only Japan and the combined EU are larger).In fact, the big news out of the EU in the latter part of July was that they finally reached agreement on a stimulus package of their own total was $860 billion!So, $4 trillion vs. $860 billion.Is it any wonder why the dollars exchange rate is in free fall?

The Fed, of course, has been on a mission of its own to protect asset values and has expanded its balance sheet by over $3 trillion since February.And when the Congress appropriates free money, the federal government must issue new debt.Normally, when a huge amount of new debt supply comes to market, the laws of supply and demand would require that the price (i.e. the rate of interest) would have to rise to clear the market.However, the Fed has pledged that interest rates wont rise for several more years (i.e., until inflation rises to their targeted 2% level, which wont happen until the economy is much further along in the recovery process).To keep interest rates at current levels means that the Fed must buy the new debt, in effect, monetizing the federal governments stimulus. That means that the U.S. money supply will continue its rapid escalation, and the value of the dollar will continue to fall vis a vis other currencies.

The Price of Gold

What does all of this have to do with golds price?Gold is priced in dollars, and the dollar is the worlds reserve currency.As the dollar falls in value vis a vis other currencies, the price of gold in terms of dollars is going to rise.

Gold is the ultimate currency, i.e., it cant be manipulated by any government.Its supply is limited, growing at a rate of about 2% per year (new mining).Historically, gold has been a hedge against inflation.But it is also a safe haven, i.e., a hedge against uncertainty (like a pandemic).So, it would be natural for its price to rise in the current worldwide pandemic, even without money supply growth.While the U.S. is clearly the money supply glutton, it isnt as if the money supply of other countries isnt growing at a faster pace than their economies (i.e., they are also creating excess money, just not as fast as the U.S.).Together, uncertainty and money creation are pushing golds price up.Will it continue? You already know the answer.

There is a danger, however, to the policies being pursued by the Administration, Congress and the Fed.The danger is that if the U.S.s money creation continues at a much faster pace than that of the rest of the western countries, there is a good chance that the dollar loses its status as the worlds reserve currency.What would take its place?Probably no singe countrys currency (like China).More likely, a basket of currencies, like an index.This would be a big blow to the U.S economy.As the reserve currency, almost all international transactions are done in dollars, creating a demand for the currency and providing cheap financing for U.S entities.All this would disappear if the dollar loses its reserve currency status.

Whats Trending

Heres whats trending in the U.S. economy:

Employment

The big news of the week was the better than expected payroll numbers for July.The headline number for net new job creation was 1.763 million, much better than the 1.4-1.5 million expectation.Once again, the headline number was the seasonally adjusted (SA) one, and it is very misleading.Given government ever-changing edicts on business closures, re-openings, capacity constraints, masks, etc. etc., and the monumental changes in consumer behavior and attitudes toward shopping, entertainment, leisure, travel since February, the use of seasonal factors makes no sense at all and only distorts the data.The non-seasonally adjusted (NSA) number was a much lower 591k, still positive, but only about 1/3rd of the headline.

The Unemployment Picture

On the state reporting level, we see the same issues.On August 6, markets were happy when the Initial Claims data (IC) from state reporting agencies showed 1.186 million new claimants (week ended August 1), much better that the 1.4 million expectation. Continuing Claims (CC) showed up at 16.107 for the July 25 week (CC lags IC by a week).The NSA data are actually much more encouraging.For IC, the August 1 week was 984k, the first time new claims have been less than one million since early March.NSA CC were also lower (15.849 million).Using the BLS most recent Establishment (Payroll) Survey, and data from those surveys back to February, the table shows the SA and NSA net new jobs.Note that the differences werent significant until the latest (July) count.

New Payrolls

Still a steep hole to climb out of, but more encouraging than the headline SA numbers. As can be seen from the chart, the much-needed downtrend in the unemployment data may have resumed.However, lets not be too hasty.This is only one data point.

In addition, that payroll survey was taken the week ending July 17, just when the re-closings had commenced.Since then, large layoffs have been announced by companies that have given up on the concept of a V-shaped recovery.The August payroll survey, taken this week (week of August 10-14) will provide us a better view of the impact that the upward spiral of cases and the reaction of various state and local governments have had on the employment situation.Unfortunately, that data release is still nearly a month away.

Bankruptcies (BKs)

As discussed weekly in this blog, publicly traded company bankruptcies continue their uptrend unabated.We are now trending for 277 for the year almost double that of 2019 (139).

Annualized Bankruptcies

Conclusions

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Money Explodes; Gold Glitters; The Recovery Slows - Forbes

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