US$ 3,000 Gold Likely By Year-End

U.S. M1 Exploding

The Fed has stepped up to the mark in the COVID–19 crisis in an unprecedented manner. The monetary base is still growing as is US M1, with the latest report showing an extraordinary rate of increase in response to this extraordinary crisis.

Chart by Author from FRED Data

Fed Expands Monetary Base but Banks Fail to React.

The latest data on the monetary base released by the Fed shows that yet again the banks have still not pushed out any money out into the real economy than was the case at the end of February. This is despite the additional creation of US$ 1.6 trillion in just nine weeks and the elimination of all reserve requirements.

The nine-week increase of US$ 1.6 trillion is double the US$ 0.8 trillion that was in existence in August 2008. Given this, it is incredible that the banks are still sitting on any reserves, let alone excess reserves of US$ 3.2 trillion.

Chart by Author from FRED Data

In the last nine weeks, excess reserves held at the Fed have jumped from US$ 1.5 trillion to US$ 3.2 trillion. Despite the huge increase, there has been no movement of the monetary base beyond the banks into the real economy.

Since Lehman, the AWMB has been rising at a rate slightly in excess of the increase of the U.S. currency in circulation until the past couple of months when the two came back in line by virtue of a decline in the AWMB by virtue of the elimination of required reserves and a 100 billion jump in the currency in circulation as shown in the following FRED graph.

Previously it was demonstrated that the monthly average U.S. dollar price of gold tended to rise with the general increase in the U.S. monetary base. Post Lehman that relationship was expected to continue as it did for a while.

However, that ended when it was realized the money created by the Fed was being sterilized by the banks which just retained it as excess reserves encouraged by the Fed which for the first time paid interest on such excess reserves.

The spike in the gold price in September 2011, to the monthly average peak price of US$ 1,772, was also partially the result of some large gold producers closing out their respective hedge positions.

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Disclosure: I have no positions in any stocks mentioned, However, I could initiate a position in FSX within the next 72 hours.

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Danny Straus 1 year ago Member's comment

Total noob question here, but what does M1 stand for?

Tony Hayes CFA 1 year ago Author's comment

Dear Danny,

The following is the Fed's definition

M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

Kind regards