Why gold fell
Gold dropped because holders needed dollars to buy oil, so they sold gold to get the cash. The big players do not hate gold. They need dollars to buy oil and keep the lights on. Over the last 6 months, oil and gold charts moved in opposite directions. That was the trigger.
Once selling starts, it feeds on itself. Leverage traders hit their stop losses and must close positions, so they sell more gold on the futures market to cut losses. That adds downward pressure. Then commodity trading advisors, who just follow trends and do not care if it is soybeans or gold, jump on and sell because it is going down. More stop losses hit. Start a small avalanche and soon the whole mountain collapses.
The 50% drawdown rule
Around 2014, over drinks in Casa de Campo in the Dominican Republic, Jim Rogers gave a rule worth remembering. Rogers co-founded the Quantum Fund with George Soros and is one of the greatest commodities traders in history. At the time gold was in a bear market. It peaked at $1,900 an ounce in August 2011 and bottomed at $1,050 in December 2015, a four-plus year decline. Rogers said he owned gold and would sit tight, then added: "No commodity goes to the moon without a 50% drawdown along the way." If you are not ready for that, you are in the wrong market, because that is how commodities and gold trade.
Test the rule. Take a base of $250 an ounce from December 1999, the end of the long bear market that ran from January 1980 to 1999. From $250 up to the $1,900 peak in August 2011, subtract half the rise from the peak, and you get 1070. Gold bottomed at 1050. Rogers called it in advance, right on the money. After that 50% drawdown, gold turned around and rose to over $5,000 an ounce a couple of months ago.
Fractal math and today's setup
Fractal math has an idea called scale invariance. Show a one-week stock chart and a 10-year stock chart with the dates removed, and they look the same. Patterns repeat at different scales, different indexes, and different time frames.
Apply Rogers' rule now. Base of about 1850 a few years ago, up to a peak of 5355. Take half the difference, subtract it, and you get around $3,600 an ounce. Gold did drop to $3,900 and now sits around 4,000. That is how it goes. This says we are at or near the bottom of the cycle, paused before going to the moon. The forecast stands at $10,000 an ounce, late this year or sometime in 2027. A drawdown followed by a major bounce matches what Rogers described, so this is a very good entry point.
How the Fed actually prints money
The Fed does print money, but the kind matters. The open market desk at the Federal Reserve Bank of New York deals only with certain banks called primary dealers. It is not a license, it is a relationship. Only about 20 names are on the list, not 200. I sat on the executive committee of one primary dealer for over a decade and talked to the Fed every day.
There are three flavors of money, M0, M1, and M2, and the Fed is not even sure what money is. What the Fed prints is M0, base money. It calls Goldman Sachs, Morgan Stanley, or Citi and asks for an offer on 5-year notes. Goldman delivers the notes, and the Fed pays with cash that comes out of thin air. Then Goldman gives that cash right back to the Fed as excess deposits, because the Fed is a bank. The Fed's securities (assets) rise and its deposits (liabilities) rise by the same amount.
That money is sterilized. It does not get lent, does not get spent, and does not drive the economy. The idea that it is stimulus is nonsense. There are trillions of dollars in excess reserves sitting on deposit at the Fed. It is just an accounting exercise, with no stimulus and no inflation from it.
Where real money comes from
The money that drives the economy comes from commercial banks. Citibank, JP Morgan, and Bank of America can do the same thing as the Fed. Go in for a loan, get approved, sign the promissory note, and the bank puts the money in your account. That money also comes out of thin air. This is M1, a different flavor. And this money counts, because with it you can hire people, invest in fixed assets, and develop projects.
So Fed money printing is almost irrelevant. The Fed has the worst forecasting record and gets its modeling wrong, and its money does not count. Everyone talks about the Fed on CNBC, but you can almost skip it. Commercial banks create the money that drives the economy.
Fiscal spending as the other engine
There is another source of real money, and it is fiscal policy, not monetary policy. When Congress and the White House pass a $1 trillion COVID package or a build-back-better bill, that is deficit spending on top of the baseline deficit. Trump did a trillion in his first term. On a baseline deficit of a trillion, Biden and Pelosi added a trillion in 2021 and another trillion in 2022. The August 2022 Inflation Reduction Act only caused inflation and reduced nothing. It was the greenest scam in disguise.
Push a trillion of government spending into an economy already overheating and you can get inflation. It works as stimulus up to capacity, but once you exceed capacity it is pure inflation. So the Fed does not matter, but deficit spending and bank money creation (M1) do. M1 is the money to watch.
Velocity is what really counts
Velocity is the turnover of money, GDP divided by the money supply, meaning how many dollars of GDP you get for each dollar of money.
A simple example. A bank gives you money and you buy gold and put it in a vault. That money has velocity of zero. It did nothing. Now instead you hire someone and pay them, they go to a restaurant for dinner, and the waiter takes an Uber home. That money has velocity of three: the wage, the dinner, and the Uber, and on and on. Owning some gold is fine and worth recommending, but money sitting in gold or just sitting still has velocity near zero. Money spent or invested, then spent again by the next person, can have a multiplier of two, three, four, or higher. That is what counts.
Velocity has been falling for 26 years. It was around 10 or 11 in 2000. Today it is barely over one, actually about two. All the money printing in the world does no good unless turnover is there.
The equation Friedman got wrong
The quantity theory of money is MV = PY, where M is money supply, V is velocity, P is the price index (inflation or deflation), and Y is real GDP. Real GDP times inflation gives nominal GDP. So money supply times velocity equals nominal GDP: how much money there is, and how fast it turns over.
The equation is true. Irving Fisher understood it, Anna Schwartz understood it, and few others did. Milton Friedman missed something. Friedman said a mature economy like the United States can grow only about 3.5% in real terms, which is about right. The only time it grows more is coming out of a recession with unused capacity. Friedman wanted P to equal one, meaning price stability with no inflation or deflation, so nominal GDP equals real GDP. He treated V as constant and M like a thermostat you dial up or down to hit 3.5% growth and stop before inflation, or dial down if the economy runs too hot, like a dashboard.
The flaw is that velocity is not constant. It was fairly flat from 1950 to 1980, the main part of Friedman's career, which made his assumption a reasonable working guess but wrong in theory. Velocity can go way up or way down. Control one variable, M, and you still do not control the other.
Inflation is behavioral
Velocity is behavioral. It is not about money supply, printing, or fiscal policy. It is about psychology, and this is where inflation can run away. Hold the money supply constant, print no more money, but double or triple velocity, and you blow nominal GDP through the roof and land in inflation fast.
Inflation is a real danger, but it does not come from the Fed or M0. It would not even come from fiscal policy unless psychology changes. Confidence and fear can speed up money circulation even when the money supply barely moves, and that can overpower official policy faster than standard models expect. To watch for inflation, watch behavior, not central bank speeches.
