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US Money Supply Could Cause Rise in Gold Bullion

March 10, 2010 – While the US government has spent nearly $1 trillion in stimulus funds to encourage economic growth, the flood of additional money into the open market could help lead to a rise in gold bullion prices. As John Embry, Chief Investment Strategist at Sprott Asset Management said, “When inflation rears its ugly head and I suspect that will be sooner rather than later, the market will force interest rates higher in the US.” These rates will likely devalue the currency and lead to a rise in gold prices.

This fear of a swelling money supply and the accompanying inflation has "led some investors to seek safety in gold and that trend is continuing," Jeffrey Nichols, Senior Economic Adviser to Rosland Capital. "In the short term I see gold struggling higher ... though I do think by mid-year we will have new highs... [Gold bullion prices] will break through $1,227 in the next few months"

As Bob Tonachio, CEO of Robert James & Associates, Inc says, “If money supply grows faster than the economy that will create inflation as it is impossible for the economy to grow anywhere near the vertical spike in the monetary base, inflation is coming.” He continues to say, “As the money supply rises, so does the price of gold [bullion], eventually. As a result, gold has been a perfect hedge against inflation.”

History confirms this theory. Tonachio states, “In 1973, inflation was 9% and gold rose 67%. That was a pattern common in the 1970s. The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold [bullion] could do much better this time around, reaching $3,000 or $4,000, or $5,000 per ounce.

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Jonathan Monroe

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