I once said there was a correlation between the Federal Reserve balance sheet and the gold price. As a result there is also a correlation between M1 and the gold price. This is still the case.
Chart 1: Total Central Bank Assets |
Even though the Federal Reserve balance sheet has been going up due to QE3, there is one central bank that did the opposite recently. That dreaded central bank is the ECB.
As you can see on Chart 2, the ECB has shrinked its balance sheet due to the repayment of LTRO. European banks paid off 137 billion euro on 25 January 2013. So you can see the dip here.
Chart 2: ECB Assets |
That repayment of LTRO coincided with a rise in the EUR/USD (Chart 3).
Chart 3: EUR/USD |
And a drop in gold price in euros.
Chart 4: Gold Price in Euro |
So forget complacency in the Eurozone as reason for the dropping gold price. Just look at the balance sheet of the ECB as primary reason.