It is widely assumed that gold and debt have a strong positive correlation. The more debt is created, the lower the value of currencies, the higher the value of gold. That’s the rationale.
In recent years, many (gold minded) investors have suggested that gold has to appreciate upwards because of the huge amounts of debt created by central banks, also known as QE (quantitative easing).
The next chart makes the point in favor of gold. It shows the correlation between the U.S. debt ceiling, which keeps on rising, and gold, which exceeded the correlation aggressively in 2010 / 2011 and is now severely lagging behind. Chart courtesy: Sharelynx.com.
This chart would suggest that gold has to appreciate, as the correlation between gold and debt is seriously imbalanced.
However, the second chart shows another viewpoint, which is the rate of change of U.S. debt and the price of gold.
Gold’s rate of change has been more dramatic than U.S. debt, as suggested by the second chart. As the price of gold is in the process to make a lower low currently, it’s rate of change is close to coincide with the one of U.S. debt.
The second chart suggests that the gold price correction after 2011 was to be expected, given that the yellow metal had risen too much, too fast.
Our opinion is that the correction in precious metals is not over, but that the downside is limited. Also, we believe that this correction was very healthy, as gold’s rise was parabolic for a number of years. The fact that the herd is not interested in gold currently is one of the most bullish signals. But the correction has created a lot of damage, and it will take time to repair that, so don’t expect a monstrous rally in the coming 12 to 24 months.
This article was originally posted at Crush The Street (subscribe for the free newsletter)