Relationship Between Gold and Debt
Source: safehaven.com
There are some traders aware of a correlation between the gold price and the trade weighted US dollar. Is there possibly a relationship between the gold price and the amount of US debt.
Just thinking of this in an economic way, as the amount of debt increases the value of the dollar should lower. The value of the dollar is based on the belief of the holder that it will maintain it ability to be swapped for say a certain amount of widgets. Let me expound on this logic. I am calling a widget some commodity, it could be a bushel of grain, a pork belly or an ounce of silver. Today, you trade a widget for a dollar, you are assuming / hoping that next week or 2 years from now you will be able to trade that dollar for a widget. If the dollar goes lower, when you attempt to trade that dollar for a widget no one will agree to the trade. They will want more that a dollar. Conversely, if the dollar rises you will be able to trade that dollar for more widgets. The point of this if a person believes that the dollar will fall, they will try to get rid of their dollars for another asset, currency or commodity that will hold its value. This may explain the current interest in cryptocurrencies.
The more debt owed by a country, the higher the possibility that the value of its currency will fall. Think of it in terms of a business, if a business is overloaded with debentures its stock price should fall because with debt comes debt service and the debt service takes away from profits. Profits are what drives the stock price.
Now to examine the logic of a correlation between debt and gold. Let's start with the above chart. From 2000 till 2010 there was a very close tracking of the two. From 2010 to 2013, gold went above the debt line. This was likely caused by the financial meltdown that occurred in 2008 (notice the spike in 2008). The public moved to gold to protect their wealth, the demand for gold grew and so did the price. The rate of added debt hit an inflection point in 2008 also caused by the financial debacle. The debt was magnified with the quantitative easing programs which were wealth transfers from the middle class to the 1%ers. Around 2012-2013, they hammered the price of gold to keep the economy from popping. This is still their modis operandi today.
Another factor to consider are the effects of inflation that depreciates the currencies.As commodities rise in price due the the dollar falling in value, which includes the blind faith in Fiat and debt instruments. This is a ticking time bomb which would cause a mad rush into precious metals. You thought the rise of crypto was something, you have not seen anything yet. Great post @outwalking.
Yes, I was remiss by not addressing inflation. In my opinion, I believe that a barter system will emerge in many areas but not all. Regarding cyptos, they will depend on the internet. If the net goes down in areas, cryptos will be of not use in those areas. Fiat will be toilet paper like the bolivar is in Venezuela and I think the governments know this, that is why they are pushing people to go cashless. Metal will not be the panacea or the 'silver bullet' so to speak. Just envision trying to buy a loaf of bread (let's say it costs a dollar) with an ounce of gold (let's say it is worth $1,000) how is the bread guy going to give you change? This is the reason dollars came to be. Bitcoin offers a solution but the problem is bitcoin is intangible as it only exists in a virtual world, it is totally reliant on the net. I appreciate your insight, it gets me thinking, thank you.
Well, here is one solution. Fractional silver, and the one gram gold that can also be broken off. I bought these a while back, also available in bar type. The romans did this quite often to make change..
Yes, the is a good idea for gold they came out with a credit card sized ingot that you could separate into grams. It is called a CombiBar.
Another way is to buy junk silver.
All I wanted to react has been said already. Thx!
Thank you for reading. Yes the comments were very comprehensive, I learn quite a bit from others input.
Very interesting for sure. Gold should be through the roof.
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