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How the Global Money Supply Impacts GLD


Jul. 30 2015, Updated 3:01 a.m. ET

Global money supply

As a proxy for the global money supply, we’ve taken the money supply of the United States, Europe (the Eurozone and the United Kingdom), Japan, India, China, Russia, Brazil, and Turkey. The money supply used is called M2, expressed in US dollars for each country at prevailing exchange rates.

In the above chart, you can see that the pace of money supply stabilized in recent months. February’s level was similar to January’s level, at $42.97 trillion.

The global money supply has been increasing rapidly. The gold price increase kept pace with the global money supply until recently. The relationship between the price of gold and the global money supply appears to have broken.

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Money supply basics

The money supply is the total amount of currency and other liquid instruments in circulation in an economy. M0, M1, M2, and M3 are defined according to the type and size of the account in which the instrument is kept.

M0 and M1 are known as narrow money, including coins and notes in circulation. M2 includes M1, and M3 includes M2. M3 is the broadest measure of money. Meanwhile, definitions vary from country to country. A country’s central bank typically collects and publishes money supply data.

Money supply and gold

Money supply can grow as a by-product of economic growth. When money supply growth is used to prop up a financial and economic system instead of fueling strong economic growth, the price of gold is likely to climb.

This is what happens when the money supply in a system increases without any corresponding increase in the supply of goods. It leads to inflationary pressures because more money chases the same amount of goods and services. It also leads to currency debasement.

Take a holistic view

Other significant factors can put downward or upward pressure on prices. One example is the Fed rate hike announcement and the strength of the US dollar.

The impact of money supply on gold prices provides only a partial view. It’s important to look at other factors to get a complete picture of what impacts gold prices and gold stocks. These stocks include AngloGold Ashanti (AU), Gold Fields (GFI), Newmont Mining (NEM), and Kinross Gold (KGC).

ETFs that invest in these stocks include the VanEck Vectors Gold Miners ETF (GDX). Gold-backed ETFs such as the SPDR Gold Trust ETF (GLD) provide exposure to spot gold prices.

Combined, these companies constitute 17.3% of GDX’s net assets.


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