Anything but the US $

US $ Monetary Base (BASENS), 1984 to 2013[/caption]

Even though over the past year gold has markedly under performed other assets, for example only increasing 4.45% compared to the S&P 500′s 20.97%, Central Bankers reportedly haven’t lost the faith. In fact in 2012 Central Banks have purchased gold at levels not seen since 1964. What’s going on?

Simple, the United States has and continues to debase the their currency by increasing the supply of their US dollars. The chart above shows St. Louis Adjusted Monetary Base (BASENS, black line) over the period 1984 to 2013. BASENS measures how much currency is in circulation outside Federal Reserve Banks and the Treasury; in other words how much money is in the broad financial system. Over the past five years the amount of currency in circulation has increased by about 230% – a massive increase, in other words. Since Q4 2011 alone the money supply has increased by 8.6%. Part of The Fed’s so-called Quantitative Easing efforts to stimulate the economy, it just doesn’t seem to be working.

And why is measuring the monetary base important? The greater the amount of currency in circulation the greater the potential for inflation, as the increased supply of money competes to purchase a fixed supply of goods. Its that simple. And that leads one to ask what do the Central Bankers know? Why are they purchasing so much gold? Why are they reluctant to hold the US Dollar? Everyone should own some gold, in fact traditional money managers believe 5% to 10% is adequate. Myself, I’m still holding about 30% of my equity in metals, in spite of recent sales, and in fact I’ll continue to purchase metals until some degree of fiscal sanity prevails. Or the collapse, whatever comes first.

Spot gold, up 4.45% over the past year

Spot gold, up 4.45% over the past year

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