QE and the Price of Gold
I often read a lot of talk about QE and the price of gold. Many have claimed that all of this QE will result in surging gold prices (read the comment section at Zero Hedge for some examples). What I haven't heard is how that actually works. What I'd like to see is a decent theory (model) with actual supporting data.
What I'll present are some data that, at least, call the idea into question. I'm well aware that the issue is probably far more complicated than I'm presenting it but that's actually my point.
First, let's look at Gold and M0 from 2009 to the present:
There seems to be a nice linear relationship between M0 and the price of gold. Unforutnately if we attempt to apply this relationship back in time the picture doesn't look so pretty:
Why it doesn't work can be easily seen by looking at gold and M0 from 1968-2009.
The relationship is clearly not linear. It wasn't even always an increasing relationship which I think is a critical conclusion from the simplistic model that increases in M0 should result in increases in the price of gold.
I think the evidence suggests to me that I ought to remain skeptical about the alleged relationship between M0 and gold. That isn't to say that there isn't one; there may very well be, but I think it's far more complicated than many make this out to be.
I am sympathetic to the fact that there's probably a psychological factor to all of this. So long as people believe that there is a relationship, that alone could drive prices in the short-term. But I don't see why that would result in a long-term effect. There are other variables to consider, of course, (but that's kind of the point).
Anyone out there with a better model?