Need we have any more reminders of gold’s potential. Well ZeroHedge have made a compelling argument for the increase in the money supply eventually having its effect on gold prices. Below is the case which links China’s M2 supply with large increases in gold prices.

Money supply growth is extremely sluggish right now all over the world. The velocity never happened and the global economy is rolling over. The Fed is already behind the curve and so when they are forced to act the infusion will have to be huge just to stem the momentum. What will really be interesting is if they will be able to stem the momentum. I have no idea but the longer they wait the less likely they will be able to.

China Will Blink and Gold Will Soar
To illustrate the point. Take a look at China’s M2 Monthly year-over-year growth in the chart below. Do you really think they are going to allow that trend to continue? If they do what do you think the implications are for the world? For the U.S.? Want to bet on decoupling? I don’t.

China’s M2 Monthly year-over-year growth

The big point is that China will act and in a meaningful way.  What I suggest people do is go back and look at different asset classes from the prior two lows in China’s M2 year-over-year growth rate.  The first one occurred in late 2004.  The M2 growth rate then accelerated until around mid 2006.  In that time period gold prices went up around 65% and the S&P 500 went up 20%.  In the second period of acceleration from late 2008 to late 2009 gold was up 65% and the S&P500 was up 15%.  We are at one of these inflection points and considering the DOW/Gold ratio is still holding gains from its countertrend rally from last August of almost 40%, this is probably one of the best entry points to buy gold and short the Dow of any time in the last decade.  Oh and if you want more juice, when China blinks silver does much, much better than gold…

Source: ZeroHedge