There is a lot of misinformation about gold especially in the cryptocurrency community. The reality is that many tie the future price of gold to inflation. Sadly, this is another concept that is woefully misunderstood within the gold and Bitcoin realms. Either way, we will spell out what happens and what you can expect from the leading precious metal.
The assertion is that money printing is what leads the price of gold higher. Fears of inflation mean that people pour into gold as a hedge against inflation. If that were the case, the price of gold will follow that of the money supply. Did that happen?
If we go back 45 years, we will have enough time to judge the trend.
From 1975 to 1980 the numbers looked as follows:
So far, it holds. A strong case could be made that from the middle of the 1970s to 1980, the rush into gold was tied to the expansion of the money stock. These numbers bear out that many ran to gold as a hedge against inflation. If we recall, that was a serious issue in the 1970s.
We now see a M1 of about $5.7 trillion. If the model of gold rising in response, and keeping pace, it would be over $12,000 an ounce. Obviously, sitting at slightly under $2,000, we are only 1/6th of the way there.
So if it isn't the expansion of money, what is it?
With all things financial, it comes down to trust. Gold is a safety value. People move into it when they start to lose trust. What is it they are losing confidence in?
Look at the nations that experienced hyperinflation. What happened? The first thing is the population lost confidence in the government. This happened as the economy tanked and the government was in no position to stop it. Usually there is a lot of corruption which put the trust level down to begin with.
Once things started to go sour, the government, along with the central bank, started to print money. They believed they could inflate the economy back into prosperity. Each time it failed.
People start to hoard their money in real assets in an effort to avoid the local currency. Since it is a national matter in these cases, the money cannot flow outward on an international scale. At the same time, in most instances, there are supply shortages of the goods that people need to survive. This is where the price increase is really felt.
Of course, the destruction of capital formation in these countries is enormous. Depending upon the country, hundreds of billions, if not trillions, are wiped out. In this regard, the money printing is really a drop in the bucket. The central bank cannot print enough to keep up.
If we have a sovereign debt crisis arising in the next couple years, I would expect gold to fare well. The yellow metal most likely is going to benefit from the run up that we will see in commodities in general as things start to get tight with supply chains being interrupted.
As always, the situation in Europe is where I am watching to see what shakes out. That is the one area that was fairly solid but is teetering. If that rolls over, we could see the situation get much worse.
And with a second wave of lockdowns taking place, we are apt to see another leg down.
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gif by @doze
Posted Using LeoFinance Beta