How Money Flows Affect the Financial Markets

When central banks buy bonds from banks and dealers, they’re putting money into circulation, making it easy for people and businesses to borrow. At the juncture where money becomes easier to borrow, the potential for commodity markets to become explosive reaches its zenith.

Commodity markets thrive on money, and their actions are directly related to:

  • Interest rates

  • Underlying supply

  • The perceptions and actions of the public, governments, and traders, as they react to

    • Supply — how much is available and how fast it’s going to be used up

    • Demand — How long this period of rising demand is likely to last

Remember that demand is not as important for most of the business cycle as the supply side of the equation.

The higher the money supply, the easier it is to borrow, and the higher the likelihood that commodity markets will rise. As more money chases fewer goods, the chances of inflation rise, and the central banks begin to make it more difficult to borrow money.

If you keep good tabs on the rate of growth of the money supply, you’ll probably be ahead of the curve on what future trends in the markets are going to be.

To make big money in all financial markets, futures and options included, you have to find out how to spot changes in the trend of how easy or difficult it is to borrow money. The perfect time to enter positions is as near as possible to those inflection points in the flow of money — when they appear on the charts as changes in the direction of a long-standing trend.

These moves can come before or after any changes in money supply or adjustments to borrowing power appear. However, when a market trends in one direction (up or down) for a considerable amount of time and suddenly changes direction after you notice a blip in the money supply data, you know that something important is happening, and you need to pay close attention to it.

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