Gold & the Money Supply in 2009
More money, less gold, and an economic policy to destroy the value of currency...
MORE MONEY is chasing less gold each and every day, reports Commodity Online in Mumbai, India. That's one reason why Gold Prices could zoom to a record $2,000 in 2009, according to a ne 2009 forecast from Mumbai-based Commtrendz Risk Management Services.
All over the world, it goes on, the supply of money to developed economies show an average growth rate of around 7% annually. World gold supplies, in contrast, have hardly gone up by 1% or 2% for many years.
In 2008, central banks around the world have acted in concert to lower interest rates to such levels that low interest rates themselves start to stimulate economies. The ECB and Bank of England have now cut their short-term interest rates by 0.75% to 2.5% and 1% to 2% respectively. Japan and the US now peg rates at just about zero. The fiscal spending programs of US could expand into many trillions of dollars.
The above efforts – coupled with monetary stimulations in the form of direct injections into the banking system – are aimed at freeing the world from the current deflationary grip. But this could create an explosive inflationary situation on the back of higher money supply growth.
Nominal increases in paper money prices for commodities could lead to an inflationary push to the whole commodities complex. Crude oil should not escape from it. Higher input costs amid longer term positive demand forces could see oil prices testing earlier highs in coming years, which will only support the Gold Price as it shares a strong correlation with energy, says Commtrendz.
And with that 7% annual growth in money supplies outpacing growth in world gold supplies more than 3 times over, what we get in simple terms is more money chasing less gold day by day. That's a perfect recipe for high inflation and higher Spot Gold valuations, believes the consultancy.
So far during this bull market, Gold Bullion has not yet made a new high in real, inflation adjusted terms. Indeed, gold is trading nowhere near new REAL highs these days. In order to do so gold should be trading above $2,000 an ounce and more.
Now the United States is unwittingly engineering a deep, protracted problem in an effort to come out of its financial crisis. It could take years to repair the investment community's sentiment, and in the process it could take a toll on the US Dollar in the form of it losing its status as the world's No.1 reserve currency.
Gold trades inversely with the US Dollar most of the time, historically creating a very high correlation. Over the previous few months, however, the correlation has weakened due to many factors like the investment panic and struggle for liquidity, which made people sell even their gold positions.
The US Dollar's recent strength amid the deleveraging of "carry trade" betting seems to have come to an end. Historical drivers of currency movements – such as interest-rate differentials and current account balances – should help dictate the correlation of Gold in 2009. And those interest-rate and trade balance factors look to be Dollar negative.
As the severity of this economic crisis has become apparent with a slew of extremely weak economic indicators being reported around the world, the United States' continued efforts to reflate its economy leave itself bleeding from negative real rates, an inflated money supply, and a high service-cost of the public debt. The same could also be the case for other economies in the form of higher monetary expansion, hence leading to a loss of the value of currency.
All in all, believes Commtrendz, these factors would be supportive for Gold Investment.