The following chart of euro-zone True Money Supply (TMS) was part of a discussion on monetary inflation in a TSI commentary published last Sunday.

The ECB introduced a new QE program about two weeks ago. This program is scheduled to get underway in March and will add to the euro-zone money supply, but my TMS chart indicates that the euro-zone’s monetary inflation rate has already accelerated. Specifically, the chart shows that the year-over-year (YOY) rate of growth in euro TMS began to trend upward during the second quarter of last year and ended the year above 9%, which is the highest it has been since the first half of 2010. Note that there was a money-supply surge late last year that pushed the YOY growth rate up from 6.4% in October-2014 to 7.3% in November-2014 to 9.3% in December-2014. In other words, the ECB has introduced a new money-pumping program at a time when the money-supply growth rate is already high and rising.

By the way, this is not short- or intermediate-term bearish for the euro. On the contrary, it will be a bullish influence on the euro/US$ exchange rate if it causes European equities to build on their recent relative strength.

The next chart shows the ISM Manufacturing New Orders Index.

The New Orders Index is a US recession indicator. Its message at this time is that a recession is not imminent, although the downturn of the past two months opens up the possibility that a recession signal will be generated within the next couple of months. I currently don’t expect it, but it could happen.

As a recession indicator the historical record of the New Orders Index is good, but not perfect. Sometimes it signals a recession that never comes. However, there is a leading indicator of US recession with a perfect track record, and I’m not talking about the yield curve. This indicator’s current position will be discussed in the next TSI commentary.

Sorry to belabor a subject to which I’ve already devoted a lot of blog space, but just when I thought that the gold supply-demand analysis of Mineweb journalist Lawrence Williams couldn’t get any worse, he comes up with THIS. Not satisfied with wrongly portraying, in many articles, the shift of gold from outside to inside China as an extremely bullish price-driving fundamental and representative of an increase in global gold demand, he now wants you to believe that the transfer of gold from one China-based trader to another China-based trader constitutes an increase in overall Chinese gold demand. No, I’m not making that up. Read the above-linked article.

What he is specifically claiming is that an increase in overall Chinese gold demand occurs when someone in China takes delivery of gold from the Shanghai Gold Exchange (SGE). He seems to be oblivious of the fact that all the gold sitting in the SGE’s inventory is owned by someone, so in order for Trader Wong to satisfy an increase in his demand for physical gold by taking delivery, Trader Chang, the current owner of the gold held in the SGE inventory, must reduce his demand for physical gold by exactly the same amount. There can be no net change in demand as a result of such a transaction, and, as discussed in previous posts, the price effect will be determined by whether the buyer (Wong) or the seller (Chang) is the more motivated.

Mr. Williams then goes on to say:

“…withdrawals from the [Shanghai Gold] Exchange for the first 3 weeks of the year have come to over 200 tonnes — and with total global new mined gold production running at around 60 tonnes a week according to the latest GFMS estimates, this shows that the SGE on its own is accounting for comfortably more than this so far this year. GFMS has also seen a fall in global scrap supplies — the other main contributor to the total world gold supply — which it sees as continuing through 2015 so the Chinese SGE withdrawal figures so far are, on their own, accounting for around 85% of ALL new gold available to the market. So where’s the rest of the world’s (including India) gold supply coming from?”

The answer is that the gold could be coming from almost anywhere. Furthermore, it’s quite likely that most of the gold that ‘flows’ into China and India does not come from the current year’s mine production.

Would someone please point out to Mr. Williams that gold mined 200 years ago is just as capable of satisfying today’s demand as gold mined last month, and that the total aboveground gold inventory is at least 170,000 tonnes and possibly as much as 200,000 tonnes. This aboveground gold inventory, not the 60 tonnes/week of new mine production, is the supply side of the equation.

Chris Powell has written an article in reply to my blog post “Looking for (gold price) clues in all the wrong places“. Actually, that’s not strictly true. He has written an article that purports to be a reply to my blog post, but completely ignores my central point. Instead, he shifts the discussion back to his manipulation hobbyhorse. Was this deliberate misdirection to avoid addressing my argument? You might very well think that; but of course I couldn’t possibly comment.

Here’s a hypothetical situation that will hopefully further explain the main point I’m trying to get across. Assume that Fred is looking for an opportunity to buy 1 million Microsoft shares, that Jack is looking for an opportunity to sell 1M Microsoft shares, that the current share price is $40 and that there is temporarily no one else looking to do a trade in these shares. Initially Jack offers his shares for sale at $42 and Fred bids $38, so no trade takes place. Subsequently, Jack reduces his offer price to $38 and the sale is completed at that price. The fact that the price fell $2 indicates that Jack, the seller, was more motivated than Fred, the buyer, but what if you knew nothing except that 1M shares ‘flowed’ from Jack to Fred? What would this ‘flow’ tell you about the price? The answer is: precisely nothing.

In my hypothetical example, the only way to know whether the buyer or the seller was the more motivated is to look at the price change. It’s the same story in all the financial markets, including the gold market. The price of something could go up on rising volume or it could go up on falling volume or it could go down on rising volume or it could go down on falling volume. In fact, it is possible for the price of something to make a large move in either direction on NO volume.

My point, again, is that the price isn’t determined by the volume or the ‘flow’; it’s determined by the relative eagerness of buyers and sellers. Therefore, from a practical investing/speculating perspective the most useful information is that which provides clues about the likely future intensity of buying relative to selling. In the gold market, these clues will be indicators of confidence in central banks and confidence in the economy.

This point cannot be refuted by quoting Henry Kissinger or a Chinese newspaper. It’s based on logic and economic reality.

A recent article at Mineweb discusses the latest gold-market analysis of Gold Fields Mineral Services (GFMS). As far as past or likely future gold price movements are concerned, every sentence in this article is either completely wrong or completely irrelevant.

The GFMS analysis discussed in the article follows the typical, wrongheaded pattern of adding up the flows between different parts of the market and using these flows to estimate supply and demand. It’s the same mistake I’ve addressed many times in the past, most recently in a 26th January blog post. The mistake is largely based on the misconception that current mine production constitutes the supply side of the equation, rather than just a small increment to an existing aboveground inventory.

If you start with a totally wrong premise, you will probably end up with a ludicrous conclusion. In this case the ludicrous conclusion is that gold supply is currently greater than gold demand.

In a market that clears (such as the gold market), supply can never be greater than demand and demand can never be greater than supply. Supply and demand must always be equal, with the price constantly changing to whatever it needs to be to maintain the balance.

Claiming that the supply of gold exceeds the demand for gold would be like claiming that the supply of dollars exceeded the demand for dollars. Such claims create the impression that there is a pile of gold or dollars somewhere that nobody wants or owns, because current demand has already been fully satisfied by the rest of the supply. The reality is that all gold and all dollars are always held/owned by someone, with the price (or purchasing power) adjusting to keep the supply equal to the demand.

From a supply-demand perspective, the only significant difference between gold and the US$ is that the supply of dollars regularly changes a lot (by 8% or more) from one year to the next, whereas the annual rate of change in the total aboveground gold supply is always around 1.6%. The reason, of course, is that considerable real resources (labour, materials and energy) must be employed to increase the aboveground gold supply, whereas the supply of dollars can be increased at no cost at the whim of central and commercial bankers.

That’s why I care about changes in US$ supply and do not care about changes in gold-mine production.