January 23, 2012
BY: Robert Hallberg, Topics: Gold
Gold has been in an up trending market for over a decade and last December it was up for the 11th year in a row. Many pundits in the investment world claim that gold has become expensive after a 6 fold increase in price.
Despite an increase in the price some still argue that gold is cheap based on the rapid growth in the money supply. The money supply, both M1 and M2, has been growing constantly over the past decades and it really started ballooning after the crisis in 2008. As a result of all this new money in circulation we have seen higher commodity prices including the price of gold. The chart below shows the growth in both M1 and M2 since 1959.
The next chart compares the M2 money supply against gold over the past 5 decades. Despite a substantial increase in the price of gold it appears that it is still not expensive on a historical basis when you compare it against the amount of money in circulation.
The chart suggests that the price of gold has further to go before it truly becomes expensive and given the amount of uncertainty and tension in the world right now we should expect gold to continue to outperform. Furthermore, if you study markets you will notice that a market do not simply go from being undervalued to being fairly priced. Markets tend to overshoot and go from being undervalued to being overvalued, and there no reason to believe that this bull market will be any different.
To learn about trends and spot the next investment opportunity read the Casey Report from Casey Research. It's a monthly investment news letter that breakdown economic trends in a way that is easy to understand. They make recommendations based on economic reality and their track record is several times better than the market or any mutual fund for that matter.
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