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 for our analysis. The money supply used is called M2, expressed in US dollars at prevailing exchange rates for each country.
In the above chart, you can see that the pace of money supply is gradually climbing. The money supply for the month of May increased by 1.3% month-over-month and by 4.4% year-over-year to $44.2 trillion.
The price of gold kept pace with the increase in global money supply until recently. The relationship between the price of gold and the global money supply appears to have broken due to other dominant factors, including the strength of the US dollar.
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.
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 to fuel 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. More money is chasing 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. Two examples are the Fed’s rate hike announcement, or lack thereof, and the strength of the US dollar.
The impact of money supply on gold prices provides only a partial view of the market. 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).
Combined, AngloGold and Gold Fields constitute 8.7% of the VanEck Vectors Gold Miners ETF (GDX).
Gold-backed ETFs such as the SPDR Gold Trust ETF (GLD) provide exposure to spot gold prices.