Paul van Eeden On Why Gold is Overvalued

Many goldbugs like gold as a hedge against Federal Reserve policies and high inflation. Paul van Eeden, president of Cranberry Capital, says he does not fear high inflation due to Fed policies. Van Eeden is a different kind of goldbug and in this interview with The Gold Report, he explains how his proprietary monetary measure, "The Actual Money Supply," is the reason why.

The Gold Report: Paul, your speech at the Hard Assets Conference in San Francisco was titled "Rational Expectations." You spoke about monitoring the real rate of monetary inflation based on the total money supply.

You take into account everything in your indicator that acts as money, creating a money aggregate that links the value of gold and the dollar. You conclude that quantitative easing (QE) is not resulting in hyperinflation and is not acting as a driver for the continuing rise in the gold price. What then is pushing gold to $1,700/ounce (oz)?

Paul van Eeden: Expectations and fear. It's very hard to know what gold is worth in dollars if you don't also know what the dollar is doing. When we analyze the gold price in U.S. dollars, we're analyzing two things simultaneously—gold and dollars. You cannot do one without the other. The problem with analyzing the dollar is that the market doesn't have a good measure by which to recognize the effects of quantitative easing.

Since approximately the 1950s, economists have used monetary aggregates called M1, M2 and M3 (no longer being published) to describe the U.S. money supply. But M1, M2 and M3 are fatally flawed as monetary aggregates for very simple reasons. M1 only counts cash and demand deposits such as checking accounts. M1 assumes that any money that you have, say, in a savings account isn't money. Well, that's a bit absurd.

TGR: What comprises M2?

PvE: M2 does include deposit accounts, such as savings accounts, but only up to $100,000. That implies that if you had $1 million in a savings account, $900,000 of it doesn't exist. That's equally absurd.

M3 describes money as all of these—cash, plus demand deposits plus time deposits, but to an unlimited size. One may think then that M3 is the right monetary indicator. But the problem with both M2 and M3 is that they also include money market mutual funds, a fund consisting of short-term money market instruments.

That's double-counting money because if I buy a money market mutual fund, the money I use to pay for that mutual fund is used by the mutual fund to buy a money market instrument from a corporation. The corporation takes the money it received from the sale of the instrument and deposits it into its bank account, where it is counted in the money supply. I cannot then count the money market mutual fund certificate as money, as it would be counting the same money twice.

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TGR: So there is no accurate indicator.

PvE: M2 and M3 double-count money; M1 and M2 don't count all the money. All are imperfect measurements. That is why I created a monetary aggregate called "The Actual Money Supply," which is on Paul van Eeden is president of Cranberry Capital Inc., a private Canadian holding company. He began his career in the financial and resources sector in 1996 as a stockbroker with Rick Rule's Global Resources Investments Ltd. He has actively financed mineral exploration companies and analyzed markets ever since. Van Eeden is well known for his work on the interrelationship between the gold price, inflation and the currency markets.

DISCLOSURE:
1) JT Long of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: Millrock Resources Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.

3) Paul van Eeden: I personally own shares of the following companies mentioned in this interview: Miranda Gold Corp., Evrim Resources Corp. and Millrock Resources Inc. I am a director of the following companies mentioned in this interview and receive remuneration as a director from these companies: Miranda Gold Corp. and Evrim Resources Corp. I was not paid by Streetwise Reports for participating in this interview.

Written By: The Gold Report