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(Kitco News) - Persistently elevated inflation has forced central banks worldwide to tighten their monetary policies by aggressively raising interest rates and reducing the amount of liquidity sloshing around in the marketplace.
Analysts have noted that central bank quantitative tightening has drastically reduced the global money supply, with some economists sounding the alarm that this will lead to a recession and deflation. Some economists note that the global money supply has dropped 6.6% in the last 12 months as of February. This is the most significant contraction in more than 50 years, according to some reports.
Despite the current environment, one research firm said that monetary inflation hasn't disappeared, which will be good for gold, bitcoin and other inflation hedges.
Last week Crossborder Capital said that gold prices could push past $3,000 an ounce and Bitcoin could hit $100,000 in the next decade as central banks will be forced to cover increased government spending.
"We believe that a major upswing in the Global Liquidity cycle is underway," the analysts said in the report. "This will mean a potentially sizeable monetary inflation that will be further fuelled by the need for Central Banks to plug fast-widening holes in government finances. The whopping size of the US (and others') debt burden will force a rapid and permanent return to QE-type policies. As monetary inflation rages, asset prices will be lifted higher, but traditional monetary hedges, like gold, and new ones, such as Bitcoin, may prove the major winners."
Quoting the latest data from the Congressional Budgetary Office (CBO), the analysts said that rising costs, aging population demographics, and slower tax revenue growth will continue to add to the growing deficit. The analysts noted that according to CBO estimates, government debt is expected to nearly double to $46.4 trillion by 2033, up from $24.3 in the 2022 fiscal year.
"This represents 118.2% of future GDP and an annual growth rate of 6.1% per annum," the analysts said. "The Fed will be asked to finance a sizeable chunk of this debt, not least because it seems likely that foreigners, namely China, who collectively own one-third of US government debt, will in future buy less."
Looking at the Federal Reserve's balance sheet, Crossborder said that it could rise back to 2022 levels by 2029 and could be at least 50% higher by 2033. However, the report noted that it is likely that monetary inflation will rise 75% in the next ten years.
"QE is coming back!" the analysts said.
While the British research firm has used U.S. data for its research, the analysts noted that growing debt is a global problem. They pointed out that the U.S. could be considered "the cleanest dirty shirt in the laundry basket."
"Demographic pressures are greater outside the U.S., spending commitments are bigger and
many foreign tax bases already squeezed dry," the analysts said.
Looking at the impact this increased spending will have on gold, Crossborder noted that their regression models show that a 10% rise in global liquidity leads to a 14% rise in monetary hedges.
"Using these simple extrapolations, a 75% increase in monetary inflation would easily take gold bullion prices through $3,000/oz, even using the 2022 average price as a base," the analysts said.
Looking at the crypto market, the analysts noted that Bitcoin is even more sensitive to market liquidity than gold, meaning a 10% rise in the Federal Reserve's balance sheet could lead to a 75% rise in the digital currency.
"The 75% prospective rise in liquidity could mean a more than 500% increase in crypto prices, thereby suggesting Bitcoin could easily trade through $100,000," the analysts said. "Surely, this could not happen! Could it?"
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