1. Money supply around the globe increasing at a rapid pace
2. Governments spending without remorse
3. Financial markets becoming way too irrational
Take Australia as another example. In the first quarter of 2000, the country’s M1 money supply stood at AUD$124.60 billion. In the last quarter of 2014, it was AUD$310.80 billion. This represents an increase of close to 150% over 14 years. (Source: Federal Reserve Bank of St. Louis, last accessed June 2, 2015.)
Australia and the U.K. are just a few of the many examples of developed nations where money supply has skyrocketed. In developing countries, these figures are much worse.
For instance, in India, in January of 2006, the M1 money supply stood at 7.48 trillion Indian rupees. In December of 2014, it was 22 trillion rupees. This represents an increase of 194% in a matter of eight years. (Source: Federal Reserve Bank of St. Louis, last accessed June 2, 2015.)
As money supply increases, currency value will be in jeopardy. As a result, demand for gold will increase.
Governments across the globe are spending money without any remorse. Consequently, their public debt is rising.
In the U.S., national debt has skyrocketed to over $18.0 trillion, and the government is expected to incur budget deficit until at least 2025. In other words, the public debt is only expected to increase.
Don’t be fooled into believing the U.S. is the only country with massive debt load.
At the end of March, the Japanese government debt stood at 1.053 quadrillion Yen ($8.78 trillion). By the end of fiscal 2015, in March 2016, this debt figure is projected to increase to 1.16 quadrillion yen. This is more than 200% of Japan’s gross domestic product (GDP). (Source: Japan Times, May 8, 2015.)
According to a study by McKinsey & Company of 47 countries—25 developing nations and 22 advanced nations—at the end of 2007, government debts in these 47 countries stood at $33.0 trillion. By the second quarter of 2014, these debt figures amassed to $58.0 trillion. This represents an increase of over 75% in a matter of a few years. (Source: McKinsey & Company, last accessed June 2, 2015.)
Why is rising government debt bad? At the very core, the higher the government debt goes, the more difficult it becomes for the country to pay. Greece is a great modern-day example where a country spent borrowed money. Now its creditors are asking for money, and it can’t pay them back.
Rising government debt never ends well. It creates uncertainty and causes the value of a country’s currency to plummet. Gold, in those times, does very well.
Financial Markets Getting Too Irrational
Look anywhere and you will notice something interesting; it doesn’t matter what the economic situation is, stock markets are going up.
Look at the chart below; it shows the conditions in the Chinese stock market.
The Chinese economy is outright struggling. This year it’s expected to post a dismal growth rate compared to its historical average. Economic data out of the country is simply anemic. The People’s Bank of China has lowered its interest rates several times already, and expectation is that more rate cuts will happen. There’s also a major threat of financial crisis occurring in China.
If investors were rational, the direction of the stock market would be very different in China. Understand this: the stock market is a function of economic growth. As the economy grows, companies’ profits increase, raising their stock prices as a result. Right now, when the economy is struggling and the stock market is soaring, it is nothing but an example of irrationality.
Chart Courtesy of www.StockCharts.com
Sadly, China isn’t the only place where investors have outright lost their ability to think straight. Take stock markets in the eurozone for example. They have seen solid gains to the upside as well. The common currency region is still severely underwater. The French economy, the second-largest in the region, is struggling. Greece, Spain, Portugal, and Italy also continue to paint a dire image for the eurozone. Germany, so far, has been able to hold strong. But it’s very questionable how long this last will.
It is often said that irrationality can last for a long time. But it’s not forever. Once the investors across the globe realize what they have been doing, they will run for exit. And, it will not be surprising to see them find safety in gold.
Currently, there’s a significant amount of pessimism towards gold. No one wants to even talk about it.
Investors have to keep one rule of investing in mind; during the time of serve pessimism and uncertainty, the greatest opportunities are born. Gold is currently the “next big trade” in the making. Give it some time. Those who say the precious metal is useless will soon know how wrong they actually are.
To take advantage, investors should be looking at the gold mining companies closely. As gold is setting up to skyrocket, mining companies will reap the rewards and provide leveraged return.