Let's take a look first: the relationship between gold prices and US government debt/GDP.
Without any special data analysis methods, we can see that the history of the past 30 years shows that the ups and downs of gold prices have a strong correlation with the US federal government debt/GDP.
Using linear regression to analyze monthly gold price data and U.S. Treasury bond/GDP data since 1993, it is found that the R square of the two is as high as 89%. In specific investments, this extremely high correlation means that a linear model can be directly used.
why? Why is the debt of the United States so closely related to the price of gold?
I have done the following analysis:
When the U.S. government debt/GDP is low, it means that the government’s debt burden is very light, and the government can pay higher interest rates for dollar debt. In other words, it means higher Treasury yields. Under the premise that it can be controlled, a higher yield on government bonds means a higher real interest rate of the US dollar, which often means a lower gold price.
Conversely, when the government debt/GDP ratio is higher, especially after it exceeds 90% (according to Reinhart and Rogoff's research on 41 countries from 1790 to 2009, when a country's government debt/GDP exceeds 90%, it will have a significant impact on the economy. negative impact), the U.S. government will not be able or willing to pay higher debt interest rates. In this case, the Federal Reserve will definitely choose to help the U.S. government to lower the yield of national debt, which means lower real interest rates of the dollar. Of course That means a rise in the price of gold...
Government debt/GDP→government bond yield→real interest rate→gold price is such a logic.
However, today I want to analyze this issue from a more direct and essential perspective.
For thousands of years, what is gold?
Gold is real money, the most effective weapon people have had against government-created inflation for 3,000 years.
In fact, under the Bretton Woods system more than 50 years ago, people still regarded gold as the ultimate money, and other dollars, pounds, yen, marks, and even Soviet rubles were all under the gold standard. The golden representative only.
1 dollar = 0.888671 grams of gold; 1 pound = 2.488276 grams of gold; 1 mark = 0.222168 grams of gold; 1 ruble = 0.222168 grams of gold; 1 yen = 2.46852 milligrams of gold; …
No matter what currency, it can be exchanged for U.S. dollars, and then taken to the U.S. Treasury Department and exchanged for real gold.
Unfortunately, on August 15, 1971, U.S. President Nixon announced the closure of the gold exchange window of the U.S. Treasury Department, facing the default of the world. Since then, mankind has entered the era of credit currency as a whole, and it is only 50 years now.
In January 1976, the governments of major western countries collectively signed the "Jamaica Agreement" and reached a consensus on the non-monetization of gold. Logically speaking, gold is useless—but in fact, from that time until now However, the central banks of major western countries and later many developing countries continued to buy and hold large amounts of gold.
Obviously, the central banks know exactly what the banknotes they print are.
Although it can no longer be exchanged for gold, the U.S. dollar is still a proper world currency, and gold, as a currency that has never depreciated for 3,000 years, will always be a potential challenger and rebel of the U.S. dollar, as well as a real competitor of the U.S. dollar.
In this case we can simply say:
If there are more dollars, the price of gold will rise; if there are fewer dollars, the price of gold will fall.
Many people don't realize that if broad money is the current dollar - the essence of U.S. treasury bonds is the future dollar.
Unlike the private sector, the U.S. Treasury, in coordination with the Federal Reserve, can readily create dollar currency if necessary.
When the U.S. tax balance is insufficient, the Treasury Department issues a sum of future dollars—this is the U.S. Treasury bond. The Treasury then trades future dollars for existing dollars to meet various spending obligations.
When the agreed date for future U.S. dollars (treasury bonds) arrives, the Ministry of Finance will return the existing U.S. dollars, but in more cases, it will be rolled into another future U.S. dollar (rolling issuance of treasury bonds).
Therefore, private debt cannot be used to understand the US national debt.
After abandoning the gold standard, national debt and the U.S. dollar are liabilities of the U.S. sovereign sector.
Specifically, the U.S. government borrows current dollars from the economy and replaces them with something called a "Treasury bond," a special "dollar" that earns interest. U.S. Treasury bonds are liquid and tradable in the economy. Sex, the same as the regular dollars it borrows from.
The U.S. government's "borrowing (national debt)" will never be actually repaid. A $1,000 national debt is the same as a $1,000, or even better, because it earns interest. More importantly, it will also be used by the Federal Reserve as the underlying asset (collateral) for issuing the current dollar. At this time, the future dollar will instantly become the current dollar.
Simply looking at the federal government debt of the United States, the increase in the amount means that more US dollars will become real US dollars in the future, which means that the number of US dollars itself will increase and depreciate, and the value of gold, which is a competitor to the US dollar, will automatically rise.
In contrast, U.S. GDP (or world GDP in U.S. dollars), represents the actual amount of dollars needed for transactions in goods and services, and if the U.S. national debt/GDP ratio increases, the amount of dollars exceeds the economy's current actual Need; if the ratio decreases, it means that there is a shortage of US dollars, and of course the price of gold should fall.
As a result, a strong correlation between gold-U.S. Treasury bonds/GDP is formed.
Many people know that in the four stages of the Merrill Lynch investment clock: recovery→overheating→stagflation→recession, buying gold at the end of stagflation or early recession usually has a better performance. What is the reason for this? The answer is not complicated.
In the period of economic recession, in order to save the stagnant economy, the government will generally introduce large-scale stimulus policies. Under the credit currency system, most of the stimulus policies are realized through borrowing. GDP growth stops and government debt soars. This means that government debt/GDP will rise rapidly, which will lead to a surge in gold.
This correlation relationship, when the government debt/GDP is in a benign state below 60% (before 2003), even if the economy falls into a short-term recession, the debt ratio can be maintained or reduced through economic growth later. Therefore, the relationship between gold and debt is not obvious.
After 2004, the debt/GDP of the United States continued to rise to an unsustainable state. The advent of each round of recession will bring about excessive issuance of national debt, which in turn will lead to a skyrocketing debt/GDP and a surge in the number of "future dollars". This led to a surge in the price of gold.
Observe the changes in gold prices during the seven rounds of economic recession (the gray area in the figure below) since the United States entered the credit currency era.
1973.11-1975.03 Recession: Debt/GDP fell, gold prices soared, then basically stabilized, and the recession ended and fell sharply;
1980.01-1980.07 Economic recession: Debt/GDP stabilized, gold prices soared, then basically stabilized, and the recession ended and fell sharply;
1981.07-1982.11 Economic recession: Debt/GDP rose, gold prices plummeted to the bottom and then skyrocketed, and the recession ended and fell sharply;
1990.07-1991.03 economic recession: Debt/GDP rose, gold prices continued to fall after a slight rise, and the recession ended and fell;
2001.03-2001.11 Economic recession: Debt/GDP was stable, gold prices rose slightly, and continued to rise after the recession ended;
2007.12-2009.06 economic recession: Debt/GDP soared, gold price also rose sharply and then fell, then rose again, and gold price continued to rise after the recession ended;
2020.02-2020.04 economic recession: Debt/GDP soared, gold prices rose sharply, and gold prices continued to rise after the recession ended.
Obviously, about 60% of the federal government debt/GDP is a hurdle. After passing this hurdle, after the financial crisis in 2008 and the outbreak of the epidemic crisis in 2020, the price of gold has basically risen sharply all the way.
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