Everyone knows that part of the reason that gold and other precious metals have performedso well over the past seven years is the astronomical increase in the money supply. Less well known, although certainly present, is the connection between an increase in a country's money supply and the effect on the equity markets within the given country.
Here's the connection.
Growth in Money Supply by Country Since 2007
The first part of the two variable connection is the growth in the supply of money since 2007. The following graphic depicts how the supply of money has changed by country since 2007.
The countries with the largest increase in their money supply include Venezeula (867%), Azerbaijan (755%), Ghana (583%), Mongolia (558%), Bolivia (455%), Iraq (377%), and Argentina (354%).
On the other end, the countries with the smallest increase in their supply of money include Portugal (2.2%), Ireland (2.9%), Greece (4.1%), Luxembourg (13.7%), and El Salvador (16.8%).
(A couple of notes: First, all numbers were calculated in local currency. Second, some countries were excluded due to unreliable data or a sufficient lack of data.)
Performance of Equity Markets by Country
The second of the two variable connection is the performance of equity markets by country.
Here's how equity markets have performed by country since 2007.
The best performing equity markets since 2007 include Iran (670%), Argentina (237%), Indonesia (177%), Philippines (121%), and Thailand (116%).
The worst performing equity markets since 2007 include Botswana (-98%), Cyprus (-74%), Greece (-78%), Kazakhstan (-58%), and Macedonia (-56%).
Connecting the Two
With the two variables now presented, here's what the connection between the two looks like.
The horizontal axis is the total growth in the given country's money supply since 2007.
The vertical axis is the total appreciation in equity values since 2007. The linear regression line between the two represents one measure of the relationship.
Does it look like there's a relationship?
The regression line would say yes.
How big of a relationship?
The correlation between the two is 0.28. The 0.28 means that a 1% increase in the moneysupply equates to a 0.28% increase in equity markets. Essentially, a quarter of the moneysupply growth shows up in the equity markets in the form of higher stock prices.
Now, there are certainly ways to criticize the simple econometrics behind the results. One might also want to address the effects of money supply changes on exchange rates and local prices.
What one can't ignore is that there is a positive and statistically significant relationship between money supply growth and equity markets.
Concluding
In practical terms, what this means is that when central banks start getting serious about address the manipulation they've caused, it likely won't be positive for stocks. Instead, it will likely be quite positive for owners of precious metals, gold chief among them.
