As any experienced gold investor will tell you, the price of gold is directly correlated to US debt more than any other variable.  In fact, based on current US debt, gold is perfectly justified at $1750/ounce, although it overshoots and undershoots based on emotion, CME manipulation and other variables.  And since the US will run a $1.5 trillion deficit for the foreseeable future, you can bet the bank that gold is going much higher.  The most recent economic data indicates we will surge to $28 trillion in US debt by 2018.  Doing simple math based upon long-standing historical trends, conservative estimates put gold at $3800 an ounce at that time.  Yet don't be surprised if it's much sooner than that, based upon other emotional and supply/demand driven forces.  Let's look at why.

Gold Is Mathematical

Although you can always look at gold as an “investment,” I have always thought of gold as just a better savings vehicle, especially when monetary policy is positioned to help the volatility of money in any way it can.  When the banker is paying zero interest, you don’t give up much opportunity-cost by removing your money from the bank and storing it in some other form.  If the fed is printing, QE-ing and monetizing, and the boys in the government are "stimulating" and dragging us into further debt, it would seem to make even less sense to sit green paper in a bank.  Regardless of what you think gold is, I’d like to make an argument for gold’s price-action being somewhat predictable or, if you will, “mathematical."

Back in late May and June when gold was consolidating around $1500-$1550 an ounce – and the politicians were arguing over the debt ceiling – I said very clearly to all my clients, “Get your gold before they raise the debt ceiling; because once they raise it, it will move.” It had no fundamental reason to move before they raised it (based on debt), as Geithner was using an accounting trick to hide the accumulation of debt.  However, it did in fact move before they raised it.  Gold decided to attach itself to something no one saw coming – a failing political system.  And before the debt ceiling was raised, the US politicians showed their hand, and gold, as it does in so many ways, told the truth.  So it started to run because this was a major collapse of confidence in “the system."

Given all the various forces that cause gold to move in the short term – mostly emotional – there’s one single linear variable that drives gold's movement in the long term, and experts agree will continue to be a driving force in the long-term price of gold… US Debt.  It is not emotional; it is not unpredictable.  As a matter of fact, it is quite predictable.

To clearly illustrate this point, let’s take a look at gold price action and debt accumulation since 2005.  I can take this back all the way to 2000, or even further, and it will hold true.  But then we would have to start inflation-adjusting the numbers.  So let’s look at 2005-2011 and we’ll look at 3 data points during 2011.  (The US Treasury was used to gather this debt data).

All debt-data is January 1st and gold-price data is based on the monthly average for the month of January:

• 2005 US Debt = 7.6T, Gold = $430/oz.
• 2006 US Debt = 8.1T, Gold = $520/oz.
• 2007 US Debt = 8.7T, Gold = $635/oz.
• 2008 US Debt = 10.7T, Gold = $875/oz.
• 2009 US Debt = 10.6T, Gold = $855/oz.
• 2010 US Debt = 12.3T, Gold = $1,100/oz.
• January 2011 US Debt = 14T, Gold = $1,360/oz.
• June 2011 US Debt = 14.3T, Gold = $1500/oz.
• May 2012 US Debt = 15.6T, Gold = $1650/oz.

See a pattern? The real tell is 2008 and 2009.  Debt was higher in January 2008 than it was in January 2009, and guess what?  So was Gold! This was likely due to the bailouts in 2008 and because there was a rush of debt creation to solve the debacle of 2008.  Needless to say, debt was high.  But no additional significant debt was created until later in 2009, and that skewed the debt-data in January of 2009.  But gold wasn’t fooled, was it?  You will also see the biggest jump in gold price correlated directly to the biggest jump in additional US Debt.  To say that gold gives you fiscal TRUTH about the creation of debt couldn’t be more truthful.  The reality is, an understanding of monetary policy and the history of debt-based money prove to be crucial in predicting the price of gold.

So… we’ll surge to $28 trillion in US debt by 2018.  The politicians that run this country have no incentive to fix or repair anything, but instead just try to get re-elected.  The bank pays you nothing, the fed robs you while you sleep, and the equities market traps your money with high risk while you earn modest dividends.  Or there’s the US Treasury market or the elephant in the room that will probably be the next meltdown.  Forget the number.  The economic forces that have caused the price of gold to double in the last three years and appreciate 20% per year for 11 years straight are not slowing down or going away; on the contrary, they are accelerating.

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