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Is more money chasing less and less gold every day? Yes, it is true. And that should be one reason why gold prices could zoom to a record $2000 levels in 2009!

According to a 2009 forecast from Mumbai-based Commtrendz Risk Management Services, all over the world broad money supplies in developed nations generally have an average growth rate of around 7% annually, while world gold supplies have hardly gone up by 1-2% over years.

In 2008, central banks around the world have acted in concert to lower interest rates to such levels that low interest rates themselves start to stimulate economies. The ECB, BOE has cut short-term interest rates by 0.75% to 2.5%, 1% to 2% respectively of late.

Japan and the US Interest rates are just about at zero. The fiscal spending programs of US could expand into multi trillions
of dollars. The above efforts coupled with monetary stimulations in the form of direct injections into the money system, if happen to get the world out of deflationary grip could leave explosive inflationary situation on the back of high crude oil prices.

Nominal paper money increase will lead to inflationary push to whole commodities complex and crude oil should not escape from it.

Higher input cost amid longer term positive demand forces could see oil prices testing earlier highs in coming years and which will only support gold prices as gold too shares a good correlation with energy.

Money supplies in developed nations generally have an average growth rate of around 7% annually, while world gold supplies have hardly gone up by 1-2% over years.

So what we get in simple terms is more money chasing less gold day by day, which is a perfect recipe for high inflation and higher gold prices.

Gold has not made a new high in real terms (inflation adjusted) yet. Gold is trading nowhere near new ‘REAL’ highs these days. In order to do so gold should be trading above $2000 levels.

US Dollar Weakness:

The US has unknowingly engineered a deep protracted trouble in an effort to come out of its financial crisis, which could take years to repair investment community’s sentiment and in the process could take a toll on its currency in the form of losing the reserve currency status.

Gold trades inversely with the US dollar, which historically has explained a very high correlation. Over previous few months though the correlation has weakened due to many other factors like investor’s struggle for liquidity, which made them sell even their gold positions.

However as USD’s recent strength amid deleveraging of the "carry trades” seems to have come to an end, historical drivers of currency movements like rate differentials and current account balances should help dictate Gold’s correlation. Both of these drivers are dollar negative.

As severity of the economic crisis as an aftermath of credit crisis has become apparent with the a slew of extreme weak economic indicators being reported around the world, the continued efforts by US could leave itself bleeding from negative real rates, Inflated Money supply, high service cost of public debt. Same could also be the case for other economies in the form of higher monetary expansion, hence loss of the value of currency.

All the above factors are supportive for Gold prices.

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