Quantitative modeling of gold with projections

Introduction

Gold will enter three favorable future events.

Fed’s upcoming rate cut in September lowers dollar index. In October, BRICS+ will meet to encourage more physical gold as reserves among many central banks. The US election brings uncertainty and anxiety to the stock market.

The dollar index has been strong since the Ukraine War, but began to fall in July, especially against the past gold and commodity currencies. The pink curve below, the dollar index relative to past money, shows the actions. Gold’s closed inverse curve indicates February gold’s rise.

Gold in the fiat monetary system

To combat the increase in total global debt of $306 trillion, a new fiat monetary structure is being updated, with gold remaining the largest form of money according to central banks. Official tight money of the base currency and the treasury, the liability of the Fed and the Treasury, are the backbone of the fiat system. Money and bank credits are derivatives of narrow money.

Many international central banks are part of their Treasury and are responsible for base money and sovereign debt. Most of these central banks are increasing their gold reserves.

Tight money deals mainly look at the economy, while liquidity influences the daily prices of assets such as stocks.

The expansion of Treasury issuance provides the main supplier of tight money to the economy. The amount of Treasuries has multiplied about 90 times since 1971 at a compound growth rate of 8%, as have gold prices.

The following diagram shows the need for discipline in expanding the narrow money supply because quantity and quality are inverse to each other.

Fiat monetary conservation with the gold equation, using quantity and quality as inverses, involves the narrow US money supply M and the dollar relative to gold D or 1/gold. The two opposite factors M and D compromise each other, because physical gold provides the disciplinary basis. Physical gold maintains the honesty of any fiat currency.

Geopolitical events and Fed policies can alter the balance of the above formula. Typically, M*D = 1, which means the purple curve below remains close to 1. The above events affected the purple curve to rise from March to December 2022. The curve eventually returned to 1 recently , along with the rise in gold prices.

The formula sets the same growth rate of Treasury expansion and the price of gold in tandem of the pink and gold curves, providing a theoretical link between the interrelationships.

The narrow money supply, composed mostly of treasuries, exceeds the base currency by about 93%. Therefore, Treasuries are the de facto official fiat money in terms of size.

The chart below shows the daily quantitative patterning of the gold price by the macro factors of the dollar index, stocks, TIPS bonds, commodities and the yen. The model worked well previously when the purple curve matched the gold curve until two years ago. By multiplying the expansion factor of the narrow pink money by the purple curve, the lavender curve correlates better than the purple curve with gold. The high correlation of 0.91 seems remarkable.

The other important factor for gold price fluctuations is the dollar index. The actual change in the inverse of the light blue dollar index has about two times the decline in gold, as shown by the orange arrow in the chart below. If the dollar index falls by about 3% over the next six months, gold will likely rise 6% above the pink trend line. These constant gold price forecasts suggest $2675 and $2800 in 3 to 6 months.

The advantage of objective modeling involves projections against continuous macro factor data and tracking developments for necessary adjustment.

Gold and miners

Long-term seasonality for gold is favorable for the next 5 weeks. The BRIC+ meeting may further extend the uptrend.

The average gold price was above the second quarter average by about 6%, which will bring more profits to miners. Miners are generally undervalued compared to much higher gold prices. The same story applies to silver miners.

Conclusion

The recent depreciation of the dollar against physical gold reflects and exposes the weakness of the fiat system. The main culprit is rising fiscal deficits, which are triggering multiple record treasury totals. Downward revisions to economic statistics, such as lagged employment numbers, are becoming more distrustful. Marco market data is more reliable for investment analysis. As asset prices rise to bubble levels, new ways are needed to dispel the authorities’ misguided narratives. The link between physical gold prices and the amount of the treasury reveals the flaws in the current fiat monetary system. Physical gold provides a safe long-term advantage.