Mailvox: Gold and money supply

ME writes: Why do you care about the money supply? Did you not hear that Friedman admitted he was wrong in the June 6, 2003, Financial Times? The money supply is useless trivia unless you know the money demand also. You do realize that the demand for money changes, right? The price of gold tells you both the demand and supply, as it is the intersection point. Would you agree that as the dollar price of gold fell from over $400 in March of ’96 to $257 in Sept. of ’99 this signaled a lack of adequate liquidity and thus a deflation?

Because even if you only know one-half of the equation, it is still useful information. Especially when the supply curve shows a worrisome anomaly that has not often appeared before. Of course I heard about Friedman; no economist didn’t. And I absolutely disagree that the decline in the price of gold signaled a lack of liquidity; the very notion is absurd considering the asset inflation that took place during that time. That decline – which has now been reversed – was a very simple matter of vastly increased “supply” as the central banks dumped the majority of their gold holdings “during” this time, so much so that Portugal, Canada and Australia are almost out. Considering how influenced the price of gold is by the furious water-treaders at the central banks, it’s a very unreliable indicator of anything except of the banks’ ability to keep things afloat. For the time being.

Why the quotes? Because it is starting to appear that the bullion sales may have taken place long prior, and the Washington Agreement may merely be a cover to convert the leases on the book – de facto sales – into de jure sales for the record.

”Keep in mind that when central bankers talk about selling gold, they usually mean writing off as sold their leased gold, gold that is long out of the vault and already sold into the market and a dangerous liability for the bullion banks that borrowed it…. the Bank of Canada continues to announce (almost monthly) the sale of a little more of what’s left of our gold reserves, which are now less than ten tonnes. That too is a crock. When I published my essay When Irish Eyes are Smiling: the story of Brian Mulroney and Canada’s gold, the good folks at the Bank of Canada told me that there had been no physical gold in the bank vaults for years.”

Speaking of gold, the Relative ratio dropped to 1.048 at $395 yesterday before climbing up to 1.073. I hope that’s not it for the trough, as I was looking to buy at $375… now $380.

UPDATE: “Gold lending was a small activity during the 1980s. It was a much bigger activity during the 1990s, so obviously it was a business that was occurring on an increasing scale. If the discrepancy was 4000 tonnes over ten to fifteen years, 300 to 400 tonnes a year—well, then it was probably 200 tonnes a year in the 1980s and it was probably nearer 600 tonnes a year by 1995. That meant supply and demand were underestimated by something like 600 tonnes a year.”