Written by Damon Geller
Every major economist and the U.S. Treasury all concede that the U.S. will run a $1.5 trillion deficit for the foreseeable future, inflating the U.S. debt to a staggering $28 trillion by 2018. Ironically, these numbers by the U.S. Treasury extend to 2018 regardless of who wins the 2016 election. That is scary, and if you think this is just a meaningless number on a spreadsheet, ask yourself if paying $9 for a gallon of gas is meaningless to you and your family. Because as any experienced investor will tell you, the price of both gasoline and gold are directly correlated to U.S. debt more than any other variable. Doing simple math based upon long-standing historical trends, conservative estimates put gas at $9/gallon and gold at $3800 an ounce as the U.S. debt bomb explodes.
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."
Gasoline prices trend right along with the same math and parallel increases in U.S. debt. Of course you can’t store gasoline as a means of storing value or “your wealth” but you certainly need gasoline. As it rises it erodes your wealth, income, and your ability to save or invest. Rising gas prices also tend to run a course through the entire economy from food prices to heating your home. So if you can hedge rising gas prices by owning an asset whose gain will parallel them, thus maintaining your purchase power, then you are effectively wealthier.
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 (and gasoline’s) movement in the long term. Experts agree this massive force will continue to be a driving force in the long-term price of gold and gasoline… U.S. 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. (The US Treasury was used to gather this debt data):
- 2005 US Debt = 7.6T | Gold = $430/oz. | Gas = $1.82/gallon
- 2006 US Debt = 8.1T | Gold = $520/oz. | Gas = $2.28/gallon
- 2007 US Debt = 8.7T | Gold = $635/oz. | Gas = $2.40/gallon
- 2008 US Debt = 10.7T | Gold = $875/oz. | Gas = $2.90/gallon
- 2009 US Debt = 10.6T | Gold = $855/oz. | Gas = $2.75/gallon
- 2010 US Debt = 12.3T | Gold = $1,100/oz. | Gas = $2.80/gallon
- 2011 US Debt = 14T | Gold = $1,320/oz. | Gas = $3.15/gallon
- 2012 US Debt = 15.2T | Gold = $1,540/oz. | Gas = $3.40/gallon
- 2013 US Debt = 17T | Gold = $1,580/oz. | Gas = $4.50/gallon
And here’s where we’re going:
- 2014 US Debt = 18.8T | Gold = $2,200/oz. | Gas = $5.00/gallon
- 2015 US Debt = 21T | Gold = $2,600/oz. | Gas = $6.00/gallon
- 2016 US Debt = 22.7T | Gold = $3,100/oz. | Gas = $6.75/gallon
- 2017 US Debt = 25.5T | Gold = $3,575/oz. | Gas = $7.50/gallon
- 2018 US Debt = 28T | Gold = $3,800/oz. | Gas = $9.00/gallon
So... we'll surge to $28 trillion in U.S. debt by 2018. Based upon the chart above, that will put gas at $9 and gold at $3800. Now do you see the 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 and gas! 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 and gas prices correlated directly to the biggest jump in additional U.S. 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 or how much the dollar will be debased against the single most needed commodity on earth… gas.
Let's face the brutal facts. 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 U.S. 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 and gasoline to double in the last three years, and appreciate 18% per year for 11 years straight, are not slowing down or going away; on the contrary, they are accelerating. How will you protect your wealth against gas and general price inflation?