The Fed Rate Cut & The Gold Price
The idea that even the short-term elasticity of production to money supply is more than 1 is of course not backed by any empirical evidence whatsoever and would require completely unrealistic assumptions about how the economy works. So there is not really much to refute as no evidence exists. However, just to illustrate how absurd the theory is and how out of touch with reality these supply-siders are, let's look at what one of them, Larry Kudlow, wrote just after the Fed rate of September 18:
"I also suspect that over time, the improved economic growth outlook for the U.S. will actually strengthen the dollar’s exchange rate, in part because the interest tax on money has been lowered.
And while gold did rally immediately after the Fed move, I would look for some gold weakness along with a better dollar."
Almost six weeks has gone now and gold is now trading at more than $785 per ounce of gold, up 9% from the level it stood at before the Fed rate cut. One can really wonder when that gold weakness that Kudlow predicted will come. The truth is that it's not going to come anytime soon. While temporary corrections will certainly come, the trend will however certainly be upwards due to the massive inflation unleashed by the Fed. I regard it as a near certainty that gold will push through the 1980 all time high of $850 per ounce within the coming 12 months-maybe even as soon as during 2007, although that is less certain.