At first glance that is a pretty interesting article. Just by looking at the graph one would automatically think that:
1. There is a direct correlation between the level of US public debt and that of the Price level of Gold in USD.
2. Since gold is below the top of the red shaded area, we should see a convergence of the level of US public debt and Price Level of gold in the future.
The next question is, should I dig into my deep pockets and start buying gold on the basis of this information or should I do a little research and look at what are the main contributing factors to the level of US Public Debt?
Firstly when we look at the red shaded area (level of Public Debt), it seems pretty consistent up until the end of 2001. Hard to tell the relationship prior as this is a very subjective snapshot. However, the increase in Public Debt coincides with the start of the "war on terror" which was the start of a very big leak in the 'bucket' aka US economy.
Then shortly afterwards in 2003 we see that the hole in the bucket gets a bit bigger with the invasion of Iraq.
From 2003 to 2008 the hole in the bucket seems to be getting bigger at a constant rate as America finds itself fighting two asymmetrical war's that seem to require more and more resources.
Then to make matters worse, we have the GFC at the end of 2008 to compound the situation. This is clearly represented in the sudden jump of the government debt at the end of 2008 of which one could hypothesis was the result of a combination of quantitative easing and bailouts.
Now what have we seen since then,
We had the finally withdraw of troops from Iraq in 2011, we have had a series of quantitative easing initiatives, and we are currently seeing a transition of power from NATO soldiers in Afghanistan to the Local Authorities.
Therefore as we see the near complete withdrawal of troops from Afghanistan in 2014, combined with defense cuts starting with $46 billion from the 2013 financial year, and additional cuts from across the services sector, that hole in the bucket which controls the RATE at which the US government accrues debt will start to get smaller.
So over the next 12-18months we will see two of the three contributing factors that increase of US public debt reduced greatly. There will be still some ongoing contributions to the Iraq and Afghan governments but this may be offset by the establishment of US resource company's in those countries. China already has their fingers in Afghanistan mining copper;
http://in.reuters.com/ar...na-idINDEE8AS0E220121129"WOAH hang on dude" your probably saying if your still reading, what about all this business with North Korea? Isn't there a Nuclear Armageddon on the Horizon? Didn't the US just beef up there missile defenses on the West Coast?
"Yeah, nah". The beefing up as such is just a precautionary measure that the media is latching onto to try to establish an environment of fear as that is what they love to do. Instead of bringing all available information to the table for all to be fully informed they are being very selective and constructing a 'story' of which they think will sell. Getting a little off track here though.
As pointed out earlier, war has been costing the US economy a lot of money and they are very apprehensive about starting another. Hence their limited involvement in Libya, Syria and Mali. The North Korean's have a long history of making threats and not carrying out any action;
http://www.businessinsid...-threats-to-south-2013-3Just to reiterate, the beefing up of missile defense systems is just a precautionary, and most likely as history has shown, this will all once again just be some playground jibba jabba from the North Koreans.
Ok, so war and defense expenses over the next 12-18months will be a greatly reduced. What will this do to the rate of change in US public debt? It will greatly reduce that rate of change.
This leaves us with what will happen in regards to that last contributing factor, Quantitative easing? Given the complexity of today's markets, I don't think even Bernanke fully knows the answer to that question. But if we look at the US debt to GDP ratio
http://www.tradingeconom...s/government-debt-to-gdpYou will notice that the RATE of change is decreasing here also. So along with other indicators that I have pointed out previously, it would appear that the US economy is STABILIZING. Therefore if the US economy is stabilizing and they are reducing their expenses at the same time, it is highly likely that the level of quantitative easing will start reducing by 2015 also.
Now what does it mean if that hole in the leaky bucket is finally blocked? It means the RATE of change in Debt will reduce to a minimum and that red line in the graph will flatten out. Then if we are to assume that the price level of gold and level of public debt are lovers that always want to be together on this graph, then one day they will meet again as convergence theory suggests in this subjective snapshot shown on the link in Crusaders post.
So if the hole is blocked, the public debt may top out at 18 trillion. Then carrying on with the assumption of convergence, this would mean that gold would come up for snuggles around the $2000 price level in 3-4 years time. This would give a return between 6.25-8.33% per annum.
Thats ok, a little better then the expected 4% from Westpac over the same time period.
But if we are talking about our retirement funds, or long term investment, then we need to look 5-10 years plus. AND if the price of gold has flat lined as suggested, then we can expect 0% from our gold held and my point stands;
There is a time to invest in gold and a time to invest elsewhere.Last point,
You need to do your research into correlation trends, or even trends in general. For example the following article;
https://www.etfdigest.co...f-Currency-War-GLD-.htmlIf we were to decide whether to hold or sell from the correlation between the price level of gold and its relationship with the Mining Index, we would all be selling our gold as this indicator suggests that gold will be going down to $1400 USD.
By looking at one set of data and saying "hey there is a trend there, lets invest!" is premature....... We could take the same line with the view that whenever the AUD is increasing in value against the USD it is a good time to buy NZD/USD as there appears to be a direct correlation there. And since the AUD increased by 2 cents last week, now is a good time.
Might sound good to someone far off in Africa but ask anyone in NZ about the current situation and they will most likely tell you that our main exports, dairy and meat and are currently getting a hammering by the drought and with the outlook bleak, it is highly likely that the forecast of future economic indicators will be downgraded and we will see a depreciation in the NZD, or words to that effect.
That is all
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