Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why Rising Debt Will Lead to $10,000 Gold

Commodities / Gold and Silver 2012 Jan 07, 2012 - 06:55 AM GMT

By: Nick_Barisheff

Commodities

Best Financial Markets Analysis ArticleGood afternoon, it's a pleasure to speak about gold at this Outlook for 2012.

Today, I'd like to focus on one important idea: the direct relationship between the rising price of gold and the rising levels of government debt that result in currency debasement. Since we measure investment performance in currencies a clear understanding of the outlook for currencies is critical.


In order to understand gold's relationship, it's important to understand that gold is money. It is not simply an industrial commodity like copper, or zinc. It trades on the currency desks of most major banks--not on their commodities desks. The turnover at the London Bullion Market Association is over $37 billion per day, and volume is estimated at 5- 7 times that amount - clearly, this is not jewellery demand.

The world's central banks know gold is money: after decades of modest sales they have become net buyers since 2009. This trend strengthened in 2010 and gained momentum in 2011. They are buying gold as a counterbalance to their devaluing currencies.

As money, gold has provided the most stable form of wealth preservation for over three thousand years - it still does today. Gold has outperformed all other asset classes since 2002.

This chart clearly shows that US federal debt (purple) and the price of gold (gold) are now moving in lockstep. This correlation will likely continue for the foreseeable future. The red line represents the repeatedly violated government debt ceilings.

US Gov't Debt

Based on official estimates, America's debt is projected to reach $23 trillion in 2015 and, if the correlation remains the same, the indicated gold price would be $2,600 per ounce. However, if history is any example, it's a safe bet that government expenditure estimates will be greatly exceeded, and the gold price will therefore be much higher.

And it's not just the US. Most Western economies have reached unsustainable levels of debt that will be impossible to pay off. It's worth noting that the US Federal Reserve, unlike the European Central Bank, can create currency without restriction. The US dollar has been the de facto world reserve currency for over half a century; the rest of the world's currencies are essentially its derivatives. Whether global debt is in euros or Special Drawing Rights issued by the IMF, the Fed, and thus indirectly the US taxpayer, may become the lender of last resort.

There are four possible ways to reduce government debt:

  • One: Grow out of it through increased productivity and increased exports. This is highly unlikely, as Western economies, and even China, are poised for recession.

  • Two: Introduce strict austerity measures to reduce spending. This has the unwanted shortterm effect of increasing unemployment and reducing GDP, resulting in even higher deficits.

  • Three: Default on the debt. This will make it difficult to raise future bond issues.

  • Four: Issue even more debt, and have the central bank in question simply create whatever amount of currency is needed.

Most politicians will select option four, since few have the political will to choose austerity, cutbacks and full economic accountability over simply creating more and more currency. Almost inevitably, they will choose to postpone the problem and leave it for someone else to deal with in the future.

Last August, the world watched as the US government struggled to come to an agreement on raising the debt ceiling, and was forced to compromise and delegate the final solution to a "super committee". Its lack of political will earned the country an immediate downgrade from the S&P. Then, the hastily convened "super-committee" failed to reach a solution.

In Europe, matters were even worse. Greece did try to write off half its debt, but Germany and France reminded the Greeks that, if they did, no one would buy their bonds. The British and Irish implemented austerity measures that raised unemployment and reduced GDP, resulting in even higher deficits. The Italians watched their bond yields rise to 7 percent. While the tsunami and related nuclear incident deflected attention from Japan's financial problems, it is a temporary lull, because Japan has the highest debt to GDP ratio of any of the developed countries.

In order to compensate for slowing growth, governments attempt to devalue their currencies and thus improve export competitiveness. This can lead to a global currency war that author and Wall Street/Washington insider James Rickards discusses in his bestselling new book, Currency Wars. This process is now well underway.

A recent Congressional Budget Office report predicted the US federal government's publicly held debt would top an unsustainable 101 percent of GDP by 2021. Currently, the official US debt is an astronomical $15 trillion.

Yet this is only the current debt. If the US government used the same accrual accounting principles that public companies must use, unfunded liabilities like Social Security and Medicare make the real debt more than $120 trillion. This represents over $1 million per taxpayer. Obviously, this amount is impossible to repay.

It's interesting to note that in almost every recorded case of hyperinflation, the point where inflation exceeds 50 percent a month was caused by governments trying to compensate for slowing growth through fullthrottle currency creation. This is exactly what we are seeing today.

These events gave me the confidence to title my new book $10,000 Gold. The book connects the many trends that will be directly and indirectly responsible for both the rising debt and the rising gold price over the next five years. It will be published this year.

To make matters worse, the irreversible macro trends I discussed in last year's Empire Club speech are still very much in place today. These include the added costs of retiring baby boomers, systemic unemployment due to outsourcing of Western jobs through globalization and rising oil prices due to peak oil.

These irreversible trends will increase unemployment, lower GDP, reduce tax revenues, increase deficits further and force governments to borrow even greater amounts.

Governments find themselves between the proverbial rock and a hard place, as even austerity measures tend to negatively impact GDP. As GDP falls and debt increases, credit downgrades are likely to follow, resulting in higher bond yields followed by even greater deficits. This becomes an unstoppable descending spiral.

Loss of purchasing power against gold continued unabated last year. The US dollar and the British pound have lost over 80 percent of their purchasing power against gold over the past decade, and the yen, the euro and the Canadian dollar have lost over 70 percent.

As we remind our clients this is not a typical bull market. Gold is not rising in value, currencies are losing purchasing power against gold, and therefore gold can rise as high as currencies can fall. Since currencies are falling because of increasing debt, gold can rise as high as government debt can grow.

Currency Decline

The sovereign wealth funds as well as the more conservative central banks will have little choice but to re-allocate to gold in order to outpace currency depreciation. This is why some central banks, particularly those of China and India, accelerated their gold buying in 2011, for a third year in a row, to nearly 500 tonnes--about onefifth of annual mine production.

While central banks have been net purchasers of gold since 2009, the real game changers will be the pension funds and insurance funds, which at this point hold only 0.3 percent of their vast assets in gold and mining shares. Continuing losses and growing pension deficits will make it mandatory for them to eventually include gold-- the one asset class that is negatively correlated to financial assets such as stocks and bonds. When this happens, there will be a massive shift from over $200-trillion of global financial assets to the less than $2 trillion of privately held bullion.

In considering where gold will be at the end of 2012, I looked back to my first Empire Club talk of 2005. I said then that it didn't really matter whether gold closed the year at $400 or $500 an ounce--the trends were in place to ensure it had much further to rise. Seven years later, we can say the same thing. It doesn't matter whether gold ends 2012 at $2,000 or $2,500, because gold's final destination will make today's price seem insignificant.

These can be frightening times, but gold always offers hope. We may not be able to heal the global economic problems of government debt, but individuals can protect and even increase their wealth through gold ownership. Gold bullion ownership, not mining shares, ETFs or other paper proxy forms of ownership, is an insurance policy against accelerating currency debasement. We use the analogy that - In the case of fire, would you rather have a real fire extinguisher or a picture of one? A number of people have approached me recently and said they wished they had listened five years ago. They feel they have missed the boat, that it's too late to buy gold. For those who feel that way, let me close with a Chinese proverb I discovered last year:

The best time to plant a tree is 20 years ago. The second best time is today.

By Nick Barisheff

www.bmginc.ca

Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment company that provides investors with a cost-effective, convenient way to purchase and store physical bullion. Widely recognized in North America as a bullion expert, Barisheff is an author, speaker and financial commentator on bullion and current market trends. He is interviewed monthly on Financial Sense Newshour, an investment radio program in USA. For more information on Bullion Management Group Inc. or BMG BullionFund, visit: www.bmginc.ca .

© 2012 Copyright Nick Barisheff - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules