The comments below were provided by Peter Greene of Fusion IQ.

One of the most important factors to watch for regarding the US economy and commodities is money supply. Put simply, money supply is the total amount of money available in the economy. This includes bills, coins, credit and all other forms of liquid financial instruments. There are a couple different measures of money supply but at US Global we follow M2 the closest because it is the broadest measure of money currently available – all money in circulation plus savings deposits and money-market accounts for individuals.

As you can see from the chart above, M2 spiked in the fall of 2008 as the Fed sought to inject additional liquidity into the US economic system. This particular chart focuses on the US but the same is true on a global basis. Countries in Europe, China and other places around the world have seen a jump in money supply. According to ISI, global money supply now sits near 10 percent. With so much excess money in the global financial system the idea was that some of it had to find its way into financial markets.

In some of these cases excess supply often ends up landing in riskier areas – which may help explain why the Nasdaq has outperformed other markets so far this year. Over the same period many commodities have rebounded sharply.

Increases in money supply have fanned inflationary fears and pushed funds towards traditional inflation-hedging instruments like gold, oil and other commodities. Deflationary forces have been strong during the economic downturn and it may be some time before inflationary pressures set in. However, if the supply of money continues to grow faster than our economy can absorb it, the likelihood of higher inflation increases.


Source: Peter Green, Fusion IQ, August 6, 2009.

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