The price of gold, on a quarterly basis, is 86% correlated – yes, 86%! – to total government debt going back to 1975… and a shocking 98% over the past 15 years! [As such,] it would seem like a no-brainer investment thesis to buy gold… as a proxy for the not-otherwise-investable thesis that US total government debt will increase in the future. [But there is more – and it is disappointment for gold bugs – read on!] Words: 280; Charts: 3
So writes Eric Boughton in edited excerpts from his post* on SeekingAlpha.com entitled Gold And U.S. Government Debt: Highly Correlated.
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Boughton goes on to say in further edited excerpts:
Here is the scatterplot with the relationship: (The most recent datapoint, 9/30/12, is the one farthest to the right on the chart.)
To see this a little better, I multiplied the gold price by 7 so the scale would be about the same, and charted both together over time. See below:
The current multiple of 6.37 is at a record distance (1.5 standard deviations) below the trendline ratio of 11.48.
If the relationship [between US debt and the price of gold] returns to trend, then the gold price will “underperform” the change in US government debt from here forward. For example, if total debt goes to $17 trillion (from today’s $11.3 trillion) over the next 5 years, and the ratio goes to 12.57 (continuing on the same trendline), then the gold price would go back down to $1352 by the end of that 5-year period .
[Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
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