Short & Sweet
Past gold bull markets have begun with a surge in the money supply

If the Fed is looking for inflation, it will find it in the money supply – something that did not happen with authority in the aftermath of the 2008 credit crisis. From June 2019, the money supply has grown by $4.5 trillion – an eight times factor year over year. Recently, the rapid growth resumed its uptrend after about six months of moving sideways. During the financial crisis that began in 2008, the Fed sterilized its money creation by routing liquidity back to its coffers in the form of commercial bank excess reserves – a strategy that kept the inflation rate from running out of control. As you can see, the money supply growth this time around goes beyond anything that occurred during the prior crisis. Whether or not it will translate to price inflation down the road remains to be seen – though we have begun to see some signs of inflation taking root, most notably in the surge in commodity prices.

“Every gold bull market over the last 50 years has begun with a catalyst that propelled significant growth in the money supply,” writes Manning & Napier, the money management firm, in a report posted at Seeking Alpha titled The Value of Gold in a Portfolio. “Each of those prior bull markets was proceeded by substantial US dollar money supply growth, making monetary expansion a key indicator. It is important to note that this alone does not guarantee a gold bull market, as there are many other variables at play. … We see the status of each of these economic factors, money supply growth, inflation, and real interest rates, as supportive of higher gold prices ahead. Policymakers have been remarkably forceful in responding to Covid-19, resulting in substantial recent money supply growth in the US, and they appear willing to continue to throw money at the crisis in the year ahead.”

overlay line chart showing gold and M1 money supply drawn in log scale 1970 to present
Sources: St. Louis Federal Reserve, ICE Benchmark Administration • • • Click to enlarge

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