An Interesting Link Between Rising Government Debt and the Price of Gold

by Peter Schiff, SchiffGold:

The federal debt keeps climbing upward and there is no indication that this has raised even a slight concern in Washington D.C.

We’ve been focusing a lot on the federal debt in recent weeks. We’ve explained that debt is a cancer on economic growth. We’ve raised the question: who is going to buy all of the Treasuries the government will have to sell to finance all of the debt. And we’ve talked about the impact of rising bond yields on the US budget as the cost of servicing the massive debt rises.

There’s a lot of bearish economic news when you factor the federal debt into the equation. But the spiraling debt might actually be bearish for gold. In fact, over the last two decades, there is a positive correlation between increased federal debt and the price of gold. 

Take a look at this chart from goldchartsrus.com. It shows that the price of gold has generally moved in tandem with the rising national debt.

But you’ll notice gold diverged from the established trend during the Great Recession. The yellow metal moved well above the general trend. Then in late 2012, it began to fall, dropping to roughly an equal level below the trendline by 2015.

As Craig Hemke noted in an article published at Seeking Alpha, gold got ahead of itself during the depths of the recession. Then it appears to have overcorrected. “Simply put, it now appears that the price pendulum had swung just as far downward in 2015 as it had swung upward in 2011.”

In other words, gold was overvalued in relation to the debt in 2011, and it was equally undervalued in 2015.

It appears the price of gold is once again rising in relation to the debt. The question is will it adjust back upward and reestablish its historical connection? That would represent a pretty significant increase in the price of gold – up to about $1,800 per ounce.

Even conservative estimates project a $25 trillion national debt by 2022. Even if gold simply tracks parallel to debt from its recent level, we are looking at a healthy gain. And of course, a major financial crisis, stock market crash, or even a run-of-the-mill recession could push gold to another peak.

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