Sound economics tells us that an increase in the quantity of money tends to boost nominal magnitudes. This insight should encourage us to take a brief look at the relationship between the quantity of money and the price of gold and, beyond that, stock prices – especially as central banks around the world continue to pursue extremely expansionary (or better: inflationary) monetary policies with no end in sight.
We would not assume that the money stock is the only factor driving gold and stock prices. Certainly not! What we are insinuating, however, is that there are good reasons to embrace the idea that in the long-term the money stock can be expected to play a rather important role in the trajectory of gold and stock prices – even if such a relationship might not be discernible in the short-term, that is over months and quarters.
In view of the fact that central banks have adopted a “crisis policy mode” from which there is no easy and quick way out, sustained high money stock growth rates – resulting especially from the continued monetisation of government debt through the banking system – is a very likely scenario. That said, there should be continued strong price support for gold and stocks in what lies ahead. In other words: Price inflation fueled by monetary inflation is here to stay, and it may even gain momentum.