10 Charts Pointing To Higher Gold Prices [SPDR Gold Trust (ETF), iShares Silver Trust (ETF)]

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February 18, 2014 2:15pm NYSE:GLD NYSE:IAU

tenGold Silver Worlds: In this article we look at gold from different angles: the money supply, the physical gold market and technical gold indicators. Ten long term charts point to a healthy condition in the gold market amid the price drop of 2013. 

We have always advocated to look at gold in a holistic way; the following charts offer a wide perspective. The charts were created and presented by Frank Holmes (USFunds.com) during the recent World Money Show.

Monetary conditions

In the first month of 2014, the M2 money supply, which is a measure of money supply that includes cash, savings and checking deposits, grew faster than the previous two years. In 2012, M2 grew 7.6 percent and in 2013, money supply rose 4.7 percent; at an annualized rate, January’s money supply growth “reached an annualized rate of increase of 8.75 percent,” according to Bloomberg’s Precious Metal Mining team. This may mean “the U.S. Federal Reserve is trying to resurrect inflation, thus increasing the appeal of gold, the supply of which can only increase about 1.5 percent to 2.5 percent annually,” says Bloomberg.

The first two charts show the historic correlation between the money supply and the price of gold. The global money supply has clearly driven gold prices, although 2013 was the year in which a significant disconnect occurred. The odds favor an upward revision of the gold price, re-establishing the long term correlation.

global money supply chart vs gold price 2001 2014 price

price of gold vs balance sheet 1999 2014 price

As Jim Rickards argues in his book, the price of gold would be well above $3,000 if there was some sort of tie between gold and the money supply. Jim Rickards still expects that the central banks will be forced by market forces to re-establish a tie with gold at some point in the future.

US Money supply vs gold price 1934 2014 price

Physical gold market

2013 was the year of a massive liquidation in physical metal backing gold ETF’s. The following chart presents the exceptional outflow of gold out of primarily the GLD . The key question, in our opinion, is not the outlfow, but what happened with that gold. The most common answer is that it went East. Is this positive or negative for gold? We believe it’s extremely positive, because the metal is now in strong hands which will keep it for several years or decades. The key point in all this is that much less physical gold will be available once the Western investment demand will pick up again, leading to a potential shortage in the gold market.

Gold ETF liquidation 2012 2013 2014 price

The East loves gold. The explosive demand for gold in China is supported by an increase in incomes, a trend that is significantly different compared to the West. This trends favors the affordability of the yellow metal among the biggest gold consumer in the world.

rising incomes china india vs gold price 2000 2011 price

China’s investment and jewelry demand has exploded in the last two years. The lower the price of gold went, the higher the demand for the metal. The following chart present an interesting insight: the average grams of gold consumed per inhabitant. Simple math learns that additional 0.1 gram of gold per capita results in an additional 130 tonnes gold demand (which is 5% of the current gold year supply).

china jewelry demand per capita price

Technical picture

From a technical point of view, gold is extremely oversold. Any historic measure shows that the current situation is extreme. One of those measures is the gold oscillator, measuring year-on-year change. A correction to the mean is long overdue.

gold oversold oscillator 2003 2014 price

The successful retest of the June 2013 bottom is a very powerful technical signal.

gold double bottom 2014 price

A short squeeze could be an important technical driver to drive short term gold prices. The chart shows how the gold price tends to rise with extreme short positions by COMEX speculators (non-commercials).

gold short squeeze 2012 2013 2014 price

What is tremendously powerful for gold stock investors is this chart: in the last 3 decades, there were only 3 times that gold stocks only saw a consecutive 3-year loss.

gold stocks decline 3 years price

This article is brought to you courtesy of Gold Silver Worlds, who advocates to own physical gold and silver outside the banking system.

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