Reworking this chart for a client this morning, refreshes and strengthens the gold bull argment in one's mind. The case is essentially nothing more complicated than money debasement (i.e. negative real rates and, more powerfully, money creation. In contrast to rapid supply growth of $, EUROs and GB£s in recent years, the supply growth of gold has been limited and slow. As such and because of limited supply, the price of gold has risen rapidly relative to the price of $, EUROs & GB£ - i.e. basic supply and demand fundamentals). This is neatly illustrated by the balance sheet sizes of the 3 largest central banks in the Developed world (i.e. the Fed, ECB & BoJ).

Since the start of this crisis the Fed's B/S has almost tripled while the ECB's has increased by approx 2.5x (in US$ terms). Furthermore its only in the past decade that the BoJ has started to expand its Balance sheet in a meaningful way, offering a simple counter explanation as to why the actions of the ECB/Fed & BoE are different (at least in magnitude) to those of Japan in the immediate 10 years following its crisis (i.e. the 90s).

The second chart shows those same central bank balance sheets overlaid with the gold price. Note the rapid increase in the gold price since 2006/07 (with the end of '07 marking the start of the financial crisis).

Fig: Central Bank Balance sheets - Total Assets/Liabilities (US$)

Fig 2: Central Bank Balance Sheet Sizes (total assets) - shown against spot Gold price (US$)

Following on from our previous comment (& FT article posted below) and illustrating the effect of high prices on drilling activity - the worldwide Baker Hughes rig count reached a new all time record last month. See Reuters comment & chart below.

"LONDON, Oct 31 (Reuters) - Soaring oil prices have spurred a worldwide drilling boom that should result in much-faster growth in oil production over the next 2-3 years, helping meet strong growth in consumption, and tempering upward pressure on prices. 
The number of rotary rigs drilling for oil and gas stands at the highest level for over two decades, according to oilfield services company Baker Hughes"

Intriguing FT article: US oil production has been falling for three decades, energy independence has been lost and, this year, petroleum has accounted for 44% of the goods trade deficit. Many expect all that to change – with the advent of shale oil – see http://www.ft.com/cms/s/0/65bfd07a-03b3-11e1-bbc5-00144feabdc0.html#axzz1cLfq3dS9