Gold Compared to the Velocity of Money

It is a simple business concept that a good regulation of the supply of money can control inflation. Hence, the regulation of global monetary policies hopes to achieve this goal with roots in Milton Friedman theories of policy making. However, the debate is still hot over the best model to apply for measuring and controlling inflation with regards to the supply of money. But there is little discussion over the correlation of velocity of money to the pressure of inflation, even if all variables were held constant.

The year 2007 saw a contraction of the global economy which gave rise to fears of an impending global depression; global central banks commenced drastic measures to avoid a total economy collapse by applying quantitative easing to put economic depression at bay.

Quantitative easing refers to the printing of currency by the government. An alternative was to lower benchmark rates as much as possible. Even with these measures implemented, there is no guarantee that higher inflation can be avoided in time to come.

Velocity of Money

One way to assess money velocity is to measure the GDP against the amount of money available. Simply put, consider the amount of money printed to the amount of money currently available in the country. With this comparison, one can measure gold against the velocity of money in America; the fact shows that gold will play an active role in indicating inflation in the future. History records the price of gold to lag behind inflation over a year, although it is possible that other factors affecting gold prices may change the trend. But recently, collected data indicated a possible 0.4% rise in money velocity was affected by a 10% rise in gold prices within a year.

As is, the last 20 years seemed pacified in relation to inflation which is reason enough for today’s economic policies to be fearful of impending inflation ahead; gold price is on the increase with the velocity of money ready to move forward.

Overview of GDP

It is difficult to determine the global GDP against the supply of money when there is insufficient good global data for analysis. Hence, gold may be the better choice to indicate an oncoming of inflation as one cannot confirm if more money printed can stimulate the GDP or economy. GDP is one factor in calculating the velocity of money where economy growth translates into a new velocity.

Supply of money

The amount of money available changes the gold prices with a possible 6 months lag. Although money supply is just one factor on gold price changes, a one percent change does affect gold price similarly.

Because of this historical trend, economists and investors are fearful that the rising gold prices are a good indication of an impending high inflation.