Gold price and money supply: The correlation every investor needs to know

The Strongest Correlation in Modern Finance: Gold and Money Supply. Understand the mechanics and why gold is not optional in QE times.

Gold and Money Supply: The Long-Term Correlation

One of the strongest correlations in financial history: When central banks print money, the price of gold rises. Huber's analysis (Figure 71) shows this measurably.

This is a very high correlation. For comparison, stocks and bonds only have a 0.15 correlation. Gold is therefore a fundamental hedge against monetary expansion.

The mechanism behind it

Why does this work?

1. Purchasing power argument

Gold is a store of purchasing power. When the central bank prints money, your paper money becomes worth less. But gold is scarce - the amount cannot simply be doubled. So its price in paper units increases.

2. Real Zinsar argument

Gold pays no dividends, no interest. It is attractive when real interest rates are negative. QE leads to negative real interest rates (nominal interest rate < inflation). Consequence: Gold becomes attractive.

3. Inflation expectations argument

When investors expect more money to be printed, they buy gold as an inflation hedge. This creates the self-fulfilling prophecy: money supply increases → gold demand increases → gold price increases.

Gold in crises: The real safe haven

Huber's analysis shows (Figure 67): In crises, when stocks fall by more than 7.5%, gold is the only asset that is positively correlated.

The lesson: The lower the real interest rates, the higher the return on gold. In today's world of QE and negative real interest rates, gold is not a luxury - it is a mathematical necessity.