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.
Nice chart.
ReplyDeleteThis does not bode well for toilet paper prices long-term.
Perhaps I will be justifying my stagflationary name yet.
Now I'm going to put on my devil's advocate hat.
ReplyDeleteYou might want to go back further in time. I don't think you will see that relationship hold up.
US Government Debt vs. Silver
I'll create a similar chart for gold and post it soon.
I meant to say that you would not see that relationship hold up as well.
ReplyDeleteObviously there are relationships between inflation, gold prices, and government debt.
There are other things going on as well though.
You inspired me. Here's my version for what it is worth.
ReplyDeleteGold, Silver, Aluminum, and US Government Debt
Mark,
ReplyDeleteGreat charts on your site. I will comment over there on silver and aluminum.
On gold, I am not sure it makes sense to go back before 1971 because the government set the price of gold before that (generally from $20 to $35). After Nixon closed the gold window, it floated.
I view three distinct periods for gold:
1971-1980: high inflation and rapidly rising gold prices.
1981-1999: high interest rates, low inflation and falling gold prices
2000-current: structural deficits, rising inflation and rising gold prices.
The current era probably won't end until rates are jacked up sky high again (unlikely) or the dollar reserve system is replaced with something more globally balanced. Until then, I think gold will continue to rise in nominal terms. My position is more nuanced than this, but those are the broad brush strokes.
One question: are you using for your study, the total debt in dollars generated by the government and the private sector?
ReplyDeleteCarlos,
ReplyDeleteI am using only the US federal debt as found here, including intragovernmental holdings (mostly the social security trust fund):
http://www.treasurydirect.gov/NP/BPDLogin?application=np
I ran a couple more models over the weekend using only debt held by foreigners, and also official debt held by foreign governments. Neither one correlated as well as total US debt.
I am not an economist but I think it would be interesting to study the total amount of dollar debt (private and public) and its relationship with the gold price. Gold is a refuge against all sources of inflation.
ReplyDeleteI am not an economist either. Maybe I'll take a look at total credit market debt.
ReplyDeleteSorry for the late post after 2 years.
ReplyDeleteI think u gotta take the total US Debt and Total Gold Available (Gold Price x Volume(gold above ground)), instead of just taking the Gold Price as per say.
Just a comment, lemme know if it's closer that way?
Julz
Student for Life,
ReplyDeleteIf you want to use all above ground gold, wouldn't you want to compare that against all world debt instead of just the debt of one country? The US doesn't own all the gold in the world.
Non stationary time series
ReplyDelete