Figuring the true value of gold

Recently the GoldMoney Foundation published an article proposing a new measure of money supply, the Fiat Money Quantity (FMQ), so that a direct comparison can be made between gold and currency, principally U.S. dollars. This has two important functions: It allows economists to compare sound money with fiat currency for the purpose of monetary analysis, and it allows us to adjust the price of gold (COMEX:GCZ13) in dollars to allow for both the increase in the quantity of FMQ and also the accumulating addition of newly mined gold.

The original article shows just how unsound currency has become since the banking crisis, with FMQ appearing to be hyper-inflating from that time. This article explores the implications for the price of gold.

Firstly let’s look at Chart 1, the chart of FMQ.

 

It differs slightly from the chart in my original article, in that I have recalculated the exponential growth curve at 5.859%, which was the average annual growth rate for FMQ between 1960 and 2008 before the banking crisis. This throws up a larger gap of $4.5 trillion between that long-term trend and FMQ today. Therefore, FMQ is now 62% over trend.

This is a massive and potentially currency-destructive development going unrecognized. But since July 2008, the month before Lehman Brothers collapsed, gold has risen from $918 to about $1,270 today, which is a 38% increase. Does this illustrate that gold is broadly discounting monetary developments?

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