Global Money Supply and Currency Debasement Driving Gold Higher

Gold is trading at USD 1,670.40, EUR 1,216.90, GBP 1,063.81, JPY 128,555.00, AUD 1,643.34 and CHF 1,500.20 per ounce.

Gold’s London AM fix this morning was USD 1,673.00, GBP 1,065.74 and EUR 1,218.05 per ounce. 

Yesterday’s AM fix was USD 1,687.00, GBP 1,070.36 and EUR 1,222.02 per ounce.

Cross Currency Table

Gold is marginally lower in all currencies today and appears to be steadying near four-week highs on further evidence of strong consumer demand in Asia. Market concerns about contagion in the eurozone should prevent significant price falls from these levels.

Jewellers and bullion dealers in India and China continue to stock up prior to their various festivals – such as Diwali in India and Chinese New Year in January 2012.

One of the primary drivers of higher gold prices in recent years has been money supply growth in the US and globally and consequent concerns about currency debasement.

Since 1998, increases in the price of gold have been correlated with increases in global M2. If central banks in both the developed and developing world continue to adhere to highly accommodative monetary policies, global M2 should subsequently rise and support a further increase in gold prices, as it has in the past.

Global Money Supply Growth – 1998 to Today 
(Eurozone, US, China, Japan, South Korea, Australia, Canada, Brazil, Switzerland, Mexico, Taiwan and Russia)

Developing China’s M2 money supply has been rising by a large 20% and Russia’s by a very large 30%.

Even developed countries such as Switzerland have seen money supply growth of 25%. Japan’s M2 is gradually moving higher after the ‘Lost Decade’ and after recent events exacerbating an already fragile situation.

Global money supply growth is increasing by 8%-9% per annum. Meanwhile annual gold production is less than 1.5% per annum.

We looked at money supply growth and charts regarding global money supply, debt levels etc in a comprehensive article in early August (‘Is Gold a Bubble? 14 Charts, the Facts and the Data Suggest Not’) when gold was trading at $1,670/oz or much the same price level as today. The charts and conclusions remain apposite.

In order to fight economic problems brought about due to too much debt, debt based paper and electronic currency has been created at historically high levels. There is no sign of this abating any time soon given the scale of the global financial and economic crisis.

Indeed, shuffling debt from one sector to another and creating more debt to deal with what was essentially a problem of too much debt is making the situation worse and leading to currency depreciation and debasement.

Growth in global money supply, U.S. dollar, euro, pound and all fiat currencies depreciation or currency debasement and massive uncertainty in global financial markets and the real risk of contagion will likely continue to lead investors and savers toward using precious metals, and specifically gold and silver bullion, as stores of value and safe havens.

For the latest news and commentary on financial markets and gold please follow us on Twitter.

NEWS

(Reuters)
Gold steadies as dollar offsets consumer boost 

(Bloomberg)
Gold Retreats as Commodities Decline After Chinese Trade Expansion Weakens

(Reuters)
Gold steady on Europe hopes; physicals help

(Bloomberg)
China Exports Slow on ‘Severe Challenges’

(The Telegraph)
UK rating downgrade ‘unavoidable’

COMMENTARY

(The Telegraph)
Ambrose Evans-Pritchard: Mario Draghi fears Italian debt spiral

(GoldSeek)
Jim Willie: Euroland & the Gold Rebound

(The Telegraph)
Will Finland be the mouse that roars and be the first to leave the euro?

(24h Gold)
Fiat Money and the Euro Crisis

(Politico)
Lackluster economy could lead to next gold rush

 

Mark OByrne

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