by Dave Allen, The International Forecaster:
The National Inflation Association is out with its 2022 Gold Education Report and, boy, is it a doozy!
The NIA’s report chronicles gold’s historical path and suggests its future track, given its close relationship to factors like M-2 money supply, price inflation, the Fed Funds rate, the U.S. dollar index, and others.
Let’s Take a Closer Look.
The NIA says the #1 factor that determines the price of gold (in U.S. dollars) in the long run is the country’s M2 money supply per capita.
The report notes that in January 1980, when the U.S. last experienced a price inflation crisis, gold peaked at $850/oz. when M2 money supply per capita was a mere $6,569 ($1.617 trillion total M2, not seasonally adjusted).
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Today, with M2 money supply per capita of $66,234 ($22.072 trillion total M2), the NIA believes dollar-priced gold could surpass $8,500 in the years ahead.
For the past 15 straight years, “gold always bottoms at the same exact price as a percentage of M2 money supply per capita of 2.7%,” according to the NIA.
In fact, when gold is less than 2.8% of M2 money supply per capita – like it is today – gold achieves median forward price increases as follows:
2.4% in 1 month (5.4 times higher than normal), 7.7% in 3 months (4.6 times higher), 10.8% in 6 months (2.8 times higher) and 24.9% in 1 year (6.4 times higher).
What’s more, gold gains 100% of the time in these situations.
Since 1968, gold’s long-term median price as a percentage of M2 money supply per capita has been 2.94%, ranging from a low of 1.2% in 1970 and 1.4% in the early 2000s to a high of just shy of 13% in 1980.
Gold, Inflation & Fed Funds Rate
When price inflation is above the Federal Funds rate (i.e., negative real Federal Funds rate), gold’s median price as a percentage of M2 money supply per capita has been 3.15%.
When price inflation is above the Federal Funds rate by 100 basis points (i.e., 1.0%) or more, gold’s median price as a percentage of M2 money supply per capita has been 3.48%.
And when price inflation is above the Federal Funds rate by 250 basis points (2.5%) or more, gold’s median price as a percentage of M2 money supply per capita has been 3.97%.
In fact, the NIA points out that gold has never settled a trading day below 2.7% of M2 money supply per capita when the real Federal Funds rate is negative by 250 basis points or more!
Today, the real Fed Funds rate is negative by 743 basis points (7.43%).
Although Fed chair Jerome Powell and his colleagues may be talking tough about raising the Fed Funds rate to rein in inflation, the NIA report says:
“It is extremely unlikely that the Fed will be able to raise the Fed Funds rate to a level that exceeds price inflation.
“Until the Fed can prove its ability to get the Federal Funds rate to at least within 250 basis points of inflation, gold has almost no downside risk” (emphasis added).
Gold & the Dollar
Another important long-term indicator for determining when to invest in gold and for estimating its future performance is the U.S. Dollar Index.
The higher the dollar is trading, the better it is for future gold price appreciation in U.S. dollars.
The dollar index is trading near a 20-year high and, according to the NIA, appears to be extremely overbought with a lot of short-term downside risk.
Any time that the dollar index corrects from artificially high levels, it tends to add significant upward pressure to the price of gold.
For example, since 1971, when the dollar index is below 102, gold sees these median forward gains: 1-month gain of 0.12%; 3-month gain of 2.22%; 6-month gain of 1.44%; 1-year gain of 1.99%.
When the index is above 102, gold sees these median forward gains: 1-month gain of 0.39% (3.25 time higher than normal); 3-month gain of 3.33% (1.5 times higher); 6-month gain of 5.09% (3.53 times higher); and 1-year gain of 14.87% (7.47 times higher).
Since 1971, when the dollar index is above 102 and the real Fed Funds rate is negative, gold achieves a median forward 1-month gain of 0.92%; a 3-month gain of 4.14%; a 6-month gain of 8.14%; and a 1-year gain of 20.93%.
The Triple Extreme Moon Indicator
Since 1971, when gold meets all three conditions of its Triple Extreme Moon Indicator (TEMI) – dollar index is over 102, real Fed Funds rate is negative, and gold is priced below 2.75% of M2 per capita – gold sees a median forward 2-year price increase of 73.5% and a 3-year price increase of 220.7%.
The NIA notes that on May 13, 2022, when gold settled at $1,812, its TEMI was met for the first time in over 19 years.
On a nominal dollar basis, gold entered a new bull market on December 17, 2015, which the NIA says it remains in today.
Many precious metals investors mistakenly believes that gold hit a “double-top” on March 8, 2022, when it settled at $2,039 – just shy of its all-time high closing price on August 6, 2020, of $2,067.
But the NIA contends that until the Fed raises the Fed Funds rate to a level that exceeds inflation, the current gold bull market is nowhere close to being over.
What’s more, gold is about to enter its ramp-up phase where it achieves its largest gains of the current bull market.
Gold’s last bull market lasted for over 10 years – from 2001 through 2011 – when gold increased by 640.4% or over 9 times more than growth in the M2 money supply per capita during the same period.