Research links global money supply and inflation expectations to gold prices

Money supply growth tends to precede gold price increases by six to nine months, says a new research paper, Linking Global Money Supply to Gold and Gold to Future Inflation, by the World Gold Council.

The paper, released today, also shows that a surge in the price of gold is an advance signal of higher velocity of money and, consequently, future inflation pressures and, as such, have a positive correlation to money supply growth. 

The findings of the paper, suggest that investors may be justified in their concerns that quantitative easing measures will lead to an increase in the velocity of money and in turn inflation, given the correlations observed with increments in the gold price.

''Many investors are concerned that the strategies put in place by central banks across the globe to reactivate the world economy and steer it away from a prolonged recession will ultimately result in inflationary pressures," says Juan Carlos Artigas, investment research manager for World Gold Council and author of the study.

Artigas says, "Our research shows that these concerns are well founded. We set out to understand the relationship that movements in the gold price have to inflation and the impact that money supply has on the performance of gold in a global context.

''As well as observing a correlation to the price of gold in both money supply and the velocity of money supply, we found that changes in the US money supply do not solely explain the changes in the price of gold.

"On the contrary, gold is impacted by many factors world-wide and as such, money supply changes in places like India, Europe, and Turkey also have an effect on its performance. In this sense, gold can be viewed as an indicator of global future inflation.''