Money supply contraction the likely cause of gold’s decline

  • XAUUSD
    (${instrument.percentChange}%)


Source: www.tradingview,com

The weekly gold charted a series of lower peaks (LP) followed by lower troughs (LT). Thus, XAUUSD is trending down on a primary basis. Therefore, in our view, the week of Monday, 18 April (black dashed vertical) was a critical period (T1) for the precious metal, marking its first LP.

The middle chart shows the M2 money supply that kinked at T1. The bottom line is the rate of change (ROC) of the money supply on a 13-week measure, representing a calendar quarter. T1 effectively begins the leg that flips the ROC negative (orange trend arrow).

A week later, on 25 April (T2), the M2 money supply crosses below its green 13-week simple moving average (red dashed vertical). I.e., the money supply decreased as the Fed syphoned liquidity out of the economy.

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Since then, gold has continued to fall, charting the next leg down in its primary trend. Interestingly, the M2 money supply points over this period (blue shaded rectangles) will update on 26 July.

Given gold's weakness, we expect the update to show a continued decrease in M2 and its associated ROC. I.e.the decline makes the greenback scarcer, exerting pressure on the precious metal. Moreover, the Fed is pursuing an aggressive monetary policy, and if this causes further kinks in the M2 line series, gold's slide may intensify.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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