Gold ETF funds could be in for a continued ride upward over the next few years if current money supply and gold price dynamics continue. Casey Research recently released a telling graphic showing the relationship of the price of gold in relation to the adjusted monetary base in the United States. It clearly shows that since October 2008, there has been a fairly range-bound relationship between these two pieces of data. Here's the graphic, with highlights and annotations added by GoldETFs.biz. We will cover these notes below.

Gold ETF investors should monitor this developing trend.

A few key observations from this chart come quickly. First, the trend lines (the straight lines drawn for both) seem like fairly good measures of the relationship ranges between the two pieces of data. Second, it has been rare for the lines representing the ongoing behavior of adjusted money supply and gold to move toward each other and narrow their distance. However, this is currently happening (as highlighted in yellow above) and the last time that happened occurred around December 2010 (also highlighted in yellow above). The result afterward was a reaction that sent gold prices to all-time highs. Could this current curbing in of adjusted money supply and gold prices be setting gold ETF investors up for another rally that leads to a new all time high?

Finally if these trend lines continue for both money supply and gold, it appears gold prices could reach $2200 an ounce sometime between the summer of 2013 (if gold goes halfway above its trend line) or in early 2014 if gold stays at its trend line. That's obviously a bullish development to think about.

Gold ETF Performance From 2008 - 2012
It's interesting to view actual gold ETF performance versus the S&P 500 and the U.S. Dollar ETF during the 2008 - 2012 time period used in the chart above. As proxies for gold, the S&P 500 and the U.S. Dollar I used the following ETFs:

  •     Gold - SPDR Gold ETF (GLD)
  •     S&P 500 - SPDR S&P 500 ETF (SPY)
  •     U.S. Dollar - PowerShares DB U.S. Dollar Bullish Index ETF (UUP)

GLD and SPY are close representations of the underlying asset class. UUP is not an exact representation of the U.S. Dollar but as close as available in the ETF space. UUP actually measures the strength of the U.S. Dollar relative to a basket of developed currencies. Thus it is not the U.S. Dollar in a vacuum but should be adequate for comparison purposes. Here's the chart and annotations as produced on the NASDAQ.com's interactive chart center.

Conclusion For Gold ETF Investors
The gold ETF route has been a much better choice than stocks or U.S. Dollars during the time period measured in the first chart by Casey Research. Going forward, if the trend continues, it appears gold ETF investors will continue to be well positioned in an asset class that benefits based off one in factor in particular - increased money supply.

View Christian Magoon's interactive GOLD ETF LIST to compare and contrast 20 plus gold ETF and ETN products.