Gold Pops Twenty Bucks, What next? (Chart)

Gold Futures, Daily Chart.

Also see:

GoldCorp (GG) Twelve Times Your Money in Ten Years (Chart)

Gold futures popped $20 off its lows this morning after stocks opened.

A look at the chart shows that price ranges are narrowing. Something is going to give soon.

From a seasonal demand perspective, the slowest period of demand for gold every year is from Spring into Summer (jewelry, industrial demand). Gold has a tendency to trend down during this period. If gold is going up from here it will take good investor demand for the physical. Demand could come from purchases by the gold exchange traded fund--GLD.

Gold made a monster run at the the end of 2008 into February 2009. The market has been moving sideways from the top.

The market continues to languish which is not a bad sign given the weak seasonal. This market should be watching closely as a breakout of this range is coming soon. The broader trend is still up.

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Money Supply, M2, Year over Year Change

Money supply is growing very fast. It has not yet had an impact on inflation. Delays in this effect usually take 12-18 months. The last trough in M2 occurred in December, 2007. Since then, M2 has been growing at an unprecedented pace.

It should be clear from the chart that the Federal Reserve Board has decided that deflation and the current financial crisis are more important that the risk of inflation.

Most forecaster see no inflation problem on the horizon. Many of these same forecasters didn't see a problem in housing. Of course, they failed to add in other components like consumer debt and the unprecedented leveraging of bank and Wall Street balance sheets.

I like to watch stocks like MOO to get a feel about inflation. Gold and MOO are telling a very different story than that being told on television.

By now you may have realized that the more things change the more they stay the same. This unprecedented growth in M2 will lead to a pick up in demand. It is only going to take a small incremental increase in demand for commodities to send the inflation indexes up. We already had a taste of this before the bubble burst.

A picture is worth a thousand words. You are looking at money stock. Think of it as fuel. Commodity prices should be rising soon--lets say in the second half of the year.