My heart goes out to all of Japan, suffering through a terrible natural disaster.
Reflecting on events, I could not help but think about parallels in the international monetary system. The stresses and imbalances in the dollar reserve system, sometimes called Bretton Woods II, have been building up since 1971.
Like the stresses on a fault line, sometimes you feel rumblings, sometimes you get small tremors, but the big changes tend to come unannounced and all at once as the pressure is relieved. The final event itself may not even cause the most damage, but may set in motion destructive forces greater than anyone can imagine. The financial tsunami that follows the end of the dollar reserve system may destroy many economic and political foundations long thought safe from harm.
Unlike a real earthquake, the financial one to come is man made, the result of a system designed to benefit the central planners and bankers for whom it was constructed.
Sunday, March 13, 2011
Wednesday, March 2, 2011
US Debt vs. Gold Price linear regression update
One of my favorite models is US Debt vs. Gold. There has been a strong correlation between the debt and gold prices since 2001. Here was the original post. The correlation gets a little weaker, but is still significant all the way back to 1971. As with any market, there are gyrations on either side of the regression line.
The first chart shows monthly debt and gold prices starting in January 2002 through March 2011 with the linear regression line.
The second chart plots them together. Notice the deep drop in prices when it looked like "this sucker was going down" in 2008. That would have been an unprecedented deflationary event, with perhaps only a handful of banks surviving. When that didn't happen, both the debt and gold started moving up a steeper slope.
The R2 of the regression is 0.95. Predicted gold prices based on the March 1, 2011 debt level of 14,172 billion are as follows:
One sigma (68% confidence):
low: 1304.92
best fit: 1375.35
high: 1445.79
Two sigma (95% confidence):
low: 1233.04
best fit: 1375.35
high: 1517.66
Since I started tracking the gold price, I haven't seen a price, even intraday, get close to a two sigma deviation.
The first chart shows monthly debt and gold prices starting in January 2002 through March 2011 with the linear regression line.
The second chart plots them together. Notice the deep drop in prices when it looked like "this sucker was going down" in 2008. That would have been an unprecedented deflationary event, with perhaps only a handful of banks surviving. When that didn't happen, both the debt and gold started moving up a steeper slope.The R2 of the regression is 0.95. Predicted gold prices based on the March 1, 2011 debt level of 14,172 billion are as follows:
One sigma (68% confidence):
low: 1304.92
best fit: 1375.35
high: 1445.79
Two sigma (95% confidence):
low: 1233.04
best fit: 1375.35
high: 1517.66
Since I started tracking the gold price, I haven't seen a price, even intraday, get close to a two sigma deviation.
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