I invested personally into gold last spring at the price of 1770 USD. Today, the price is exactly the same:1770 USD. Should I be disappointed? Absolutely not. My investment in gold was actually a long term hedge against central banks’ money printing operations. 

Naturally, gold price fluctuates in the short term, but gold is a strategic asset.  It’s always advisable to trust in the trends and you should keep your sights towards the distance. 

In the long term, gold price growth with central banks's balance sheets growth

Let’s take a closer look at the gold price relation with central bank money supply. In the figure below, I have calculated the ratio between gold price and money supply of OECD country central banks: 

During the last 14 years, the gold price ratio to OECD M3 money supply has varied between 11 and 21. Currently, we are at the lower end of that spread, at 12. 

Let’s assume that central banks will continue their money printing at the same speed since stopping now would probably push the world into a global recession. By 2023, the OECD money supply index would reach 180. In case gold/broad money supply would stay at the current level, the price of gold would reach 2250 USD/oz, a nice 26% increase from today’s price. But, if gold price / broad money supply would reach the peak it did in2011, when the ratio was 22, the gold price could go as high as 4000 USD/oz. 

While this trend analysis would show that gold prices could have the potential to double within the next few years, the recent and immediate trends are not that assuring. Within the last six  months, the price of gold has dropped by -17%, while the central banks have been flooding the markets with money. 

There are a couple of explanations for this: 

First of all, gold is competing with other investment products.

One of its competitors is long government bonds. Especially when times are uncertain, money flows into long government bonds or to gold. Last August, the long decreasing trend of the US 10 year treasury note was reversed and the 10 year treasury note has recovered back to levels before the March 2020 crash. Once this reverse trend started, the price of gold started decreasing. 

If we look at the price history of gold, a similar thing also happened in March 2008, just before gold started its big bull run. In the middle of a nicely growing gold price, its price suddenly dropped by -22% in six months. At the same time, the yield of US 10-year treasury notes jumped from 3.5% to 4.1%, a big jump in treasure notes. Once the yield of treasury notes continued their downturn trend, the gold went back to its growing trend. 

Second, gold is also competing with bitcoin as recent statistics from investment asset flow from funds clearly show.

Bitcoin has such an amazing growth period during autumn 2020 and the first part of 2021 that no wonder some funds decided to allocate their funds from gold to bitcoin. However, bitcoin’s nature is to create bubbles which tend to crash. Because of this in-built feature, in the long term, Bitcoin will not be able to replace gold as a safe asset for the world. Gold still is the only asset to hold this place, at least until bitcoin’s price stabilizes. 

Keeping this example in mind, let’s not let the short term noise confuse us from the long term trends: Gold is still the safe place for the world’s financial market and its price grows in ratio to monetary flow. If you believe that the central banks will continue printing money, consider gold.