What Is The Gold vs Debt Correlation Suggesting?

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.

debt_gold_3nov2015

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.

debt_gold_since_2000

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)

First published here: http://goldsilverworlds.com/money-currency/what-is-the-gold-vs-debt-correlation-suggesting/

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s