By John Der­rick, Direc­tor of Research, U.S. Global Investors

One of the major head­winds fac­ing the global eco­nomic recov­ery and finan­cial mar­ket recov­ery is con­tract­ing money supply.

As can be seen in the chart below, U.S. money sup­ply is grow­ing at an ane­mic 1.5 per­cent on a year-over-year basis. In Europe the sit­u­a­tion is even worse – money sup­ply there is actu­ally contracting.

We like to equate this phe­nom­e­non to try­ing to run a marathon using only one lung – it will both slow you down and leave you gasp­ing for air. Frank Holmes, our CEO, says it another way – “No money, no honey” and “No finance, no romance.” With­out a grow­ing money sup­ply to lube the gears of com­merce, the econ­omy and the finan­cial mar­kets suffer.

There was a lot of con­cern regard­ing this week’s trad­ing action, but these short-term fac­tors often just dis­tract from the big­ger and more impor­tant macro issues. We really shouldn’t be too con­cerned about a “fat-finger” trade – a “skinny fin­ger” when it comes to money sup­ply, how­ever, is some­thing to worry about.

The strug­gling economies in the euro­zone – Spain, Ire­land and Greece among them – carry more than $2 tril­lion in exter­nal debt as a group. Gen­er­at­ing the kind of growth needed to get out from under that col­lec­tive bur­den is not impos­si­ble, but it is cer­tainly more dif­fi­cult when money sup­ply growth is negative.

As we nav­i­gate through these tur­bu­lent mar­kets, we will con­tinue to use a matrix of sta­tis­ti­cal mod­els to mon­i­tor mar­ket volatil­ity and money flows. As a result, we may at times main­tain higher-than-normal lev­els of cash.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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