World Money Supply Correlated to the Price of Gold

Many investors are worried about a possible inflation for the US economy. Wealth preservation is correlated to the global supply of money and inflation together with gold prices. The application of quantitative easing by central banks will bring down world currencies which bring on inflation according to history.

Money supply effects

When there is an increase in money supply, there is a tendency for gold prices to increase too; this could be a reason for an increase in gold prices in 2010. The reason for an increase in money supply could be a good economy or an ailing economy; in the latter, central governments attempt to increase the liquidity in the market by printing more money.

With that measure, gold price tends to rise; thus, indicating an impending inflation. There is a close correlation between the US dollar value and gold prices. As gold is seen as an asset, with its correlation to the dollar, gold in any form is a better option than stocks, cash, bonds or even properties. A mere 1% change in the dollar value can raise the gold price by 0.9% in just 6 months. Similarly, any change of global currencies can impact the gold price.

As quantitative easing measures are taken, there will be a stronger demand for all forms of gold, such as numismatic gold and gold bullion. Another factor related to inflation and gold prices is the speed of money.

Recession: cause and effect

The 2007 US property market decline kick started the nation’s financial meltdown. Asset backed securities dropped drastically in their value with the extremely high interest rates that led to the current US recession. Today’s recession is considered the worst in decades as the 2008 GDP achieved only a mere 0.6% growth. With trillions lost, central governments stepped in with measures to stop a collapse of global economy.

Failing financial institutions had to be bailed out by the US Federal Reserve and Treasury with as much as $700 billion. More money was needed later in a second round of bail out as interest rates dropped to 0% to 0.25%, which is a record low. Even other nations were affected as all hurried to find a workable stimulus to boost their own economy.

It is uncertain if these bailouts or fiscal stimulus helped stave off deeper inflation but a price has to be paid which saw a great increase in the global supply of money in 2008, leading to an impending inflation.

There is no accurate prediction over the extent of inflation that can happen later; individuals are concerned over personal wealth protection after experiencing a bad bout of financial meltdown in 2007. We are not out of the forest yet. Hence, gold is the better asset to have currently with its consistent good performance for the past 10 years.