Gold Becomes More Appealing As Central Banks Print Money

Central banks are the biggest threat to the economy and biggest reason to buy gold!

Wednesday, August 10, 2016

central banks printing money

We've seen several different discussions with regard to how economic conditions are going to affect the price of gold ahead. While I do believe that the price of gold is going to head up moving forward as a result of economic conditions, that's not the big story. However, the biggest factor that's likely to send gold upward isn't the economy itself, it's how central banks around the world are dealing with economic conditions. Today, we'll talk about how central banks are dealing with tough economic conditions, what this has to do with the price of gold, and why these moves could push the price of gold up exponentially ahead.

Central Banks Are Burning Their Printing Presses!

The economy is an interesting topic. The truth is that it's a very fluid one. We see ups, we see downs, and we adjust. During tough economic times, gold heads upward as investors look to keep their asset values safe. However, these days, central banks have come up with fancy words to mask the reality of what they are doing to fix economic conditions.

The most important of these fancy words is quantitative easing. They came up with this statement because the process is designed to ease economic pressure by increasing the quantity of available funds. Seems simple enough right? Well, let's dig further into what this word really means.

In order to increase the quantity of available money in the economy, central banks have to print new money. Thanks to the fiat currency world, this becomes possible, and from the outside looking in, it seems like a great way out of a pickle. After all, if I can't afford my rent, and I can just print a few hundred bucks to cover the difference with no repercussions, well... that gets me out of the pickle, problem solved!

Seems good so far. That is, until you look at the long-term implications of these moves. While a nation's wealth is measured in dollars and cents, those dollars and cents need to be backed by something, even if it is just growth in a nation. So, every single bit of currency has a value that adds up to a total value. Let's call that the pie. Every time new money is printed, a new slice is being added to the pie. Now, take a pie and try to split it 1,000 ways. Each person eating isn't going to get enough pie to even taste the filling! You see, central banks aren't actually adding value, they are simply slimming down the value of each piece to make the whole look better!

Appearances Fade

At first glance, hearing that the party is going to have enough pie to feed the masses seems great. However, when you get to the party and you find out that your cut of the pie is nothing more than a crumb, you're not going to be happy.

At this point, the appearance of improving economic conditions around the world since this quantitative easing process started is starting to fade. As a result, we're seeing further economic hardships around the world. In fact, even the world's strongest economy, the United States, grew by only 1% in the first half of the year. That's dramatically low growth.

So, what's happening to fix the problem? Well, more quantitative easing should do the trick right? The European Central Bank, Bank of England, and several other central banks around the world see this as the answer. So, we are going to paint the pig with more fresh paint and hope that it turns into a beauty underneath somehow!

Where Does Gold Come Into All Of This?

While the appearances of an improving global economy are starting to fade, gold is starting to head up. However, this isn't going to be the worst of conditions, nor will it be the best of gold in the near term outlook. At the end of the day, we're going to reach a point where central banks around the world realize that these trends can't continue. At which point, we are likely to see a global economic downturn, sending further safe haven demand toward gold. This will send the price of gold rising exponentially!

[Image Courtesy of Flickr]

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.