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The Big picture


At The Global Speculator we like to study the relationship between long term interest rates and money supply growth (monetary inflation). In the bottom section of the chart a 3 year moving average of M3 growth in Australia is represented by the red line. 10 year bond yields are depicted in green. When the 3 year moving average of M3 growth rises above 10%, and interest rates fail to keep up, this represents periods in time where gold tends to outperform other asset classes. Money moves into gold for the protection it offers against the harmful effects of monetary inflation. In other words interest rate levels are not offering a satisfactory level of protection. We can see evidence of this occurring in the 1970's. This was the last time in history gold clearly outperformed the All Ordinaries index as demonstrated in the top section of the chart. We are arguably seeing a more pronounced example of this occurring today. Interest rates and money supply growth are effectively heading in opposite directions. Gold continues to be the primary beneficiary of this irresponsible monetary policy which is being implemented by our central banks globally. As it has done so repeatedly throughout history gold offers investors a place to preserve the purchasing power of their wealth. For a more detailed explanation on monetary inflation and its effect on the gold price I encourage you to read the following article Could Inflation Explain the rise in Gold Prices - 16/01/08