We often hear about the money printing activities (past and present) of the Bank of Japan, the European Central Bank (ECB), and the Federal Reserve. But this phenomenon prevails across the globe. And aside from the improving fundamentals for the gold market, all this paper money printing is another reason why gold prices should rise in 2015 and 2016.
In the table below, I have calculated the percentage change in M1 (includes coins, notes, and demand deposits in circulation), the most basic money supply, of several countries that are not quoted as much in the mainstream, from 2008 to 2014.
Change in M1 Money Supply, 2008 to 2014
|Country||% Change in M1 Since 2008|
(Chart: Lombardi Publishing Corporation. Data: Federal Reserve
Bank of St. Louis, last accessed April 21, 2015.)
For the six countries in the above chart, the average growth rate in the M1 money supply has been 93% from 2008 to 2014. That’s almost a doubling of the money supply in only six years! Saying the very least, there’s a massive dilution of money happening. How can the consequence of this not be hyperinflation?
Expect More Central Bank Printing
I expect money printing by central banks to continue for the simple reason that central banks are sold on the idea that money printing works to revive the economy. And I believe the People’s Bank of China, the central bank of China, will need to be the next big paper money printer.
As economic growth in China is softening, the Chinese central bank has lowered its benchmark interest rate. This is because the country faces severe headwinds. Its financial system is overly leveraged and there’s a significant amount of capital misallocation.
Just recently, a firm owned by the state defaulted on its bonds payments—this was the first Chinese firm to default on its U.S. debt. (Source: Bloomberg, April 21, 2015). According to a report from Standard & Poor’s, corporate debt in the Chinese economy stands at $14.2 trillion—higher than any other country.
I will not be surprised to see the Chinese government stepping in to bail out firms that are failing. The bailout can only happen if China starts printing money, just like its counterparts in Europe and even its neighbor Japan. (China would be smarter though if it could tie in that printing to a currency that’s at least partially backed by a hard asset such as gold. The ECB, Bank of Japan, and Federal Reserve have failed to do this.)
Think Global When Looking at Gold
More and more mainstream economists are telling us that gold is a bad investment because the U.S. economy is improving. I suggest you look beyond that. Aside from the improving fundamentals for gold, gold is a global currency, a hedge against uncertainty and currency devaluation. How can money printing be anything else but uncertainty and inflation?
To see my just-released video on the 2015 and 2016 outlook for gold, watch this forecast. It’s only three minutes long: