Indeed, it is considered almost biblical canon that a huge increase in money supply will inevitably lead to a huge increase in money supply Gold price. Historical examples of France in the late 18th century, Germany (Weimar Republic) in the 1920s, and more recent Zimbabwe or Venezuela are often cited as evidence of the relationship between money supply growth and its effect on the price of gold.
However, this is not the case. Below is a table showing the relationship of Gold prices on the monetary base from 1918 …
Since the gold price peak in 1980, the rate has fallen sharply. The low point (0.28) was reached in December 2015. All of this decline occurred in the context of quantifiable greater growth in the supply of money and credit.
More tellingly, all of this decline occurred while the price of gold rose from $ 850 to $ 2000 an ounce. The decline in the ratio occurred between 1934 and 1970 while the price of gold remained fixed at $ 35 an ounce.
So we have a steady rise in the price of gold, but the ratio of the price of gold to the monetary base continues to decrease. Seems like it should be the other way around. Or maybe it is not the growth in the money supply that determines the price of gold. Perhaps the price of gold reflects something other than the amount of money.
Indeed it is. The higher gold price correlates with the loss of purchasing power of the US dollar.
It is equally important that the US dollar’s loss of purchasing power is NOT quantifiable and predictable. In other words, doubling the money supply over a period of time does not necessarily mean that the US dollar will lose half of its purchasing power.
The expansion of the supply of money (and credit) is inflation. The effects of this inflation, such as the loss of the US dollar’s purchasing power, are volatile and unpredictable.
(Read more about the US dollar and the price of gold in my article Gold and US dollar hegemony.)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT IS NOT AND WHO IS RESPONSIBLE FOR IT and Everyone welcomes the FED!