Last week we got the Autumn statement from the chancellor, which can be summed up with the following points:
■Spending to increase 12% in four years
■from 2010 to 2017 the national debt will double
■Osbourne to borrow 55% more Darling over the life of this parliament
We also learned that the now projected level of UK debt in March 2017 will be £1498bn, this of course is the ‘massaged’ number which looks the ‘best’ – It doesn’t include unfunded liabilities (stuff the government has promised to pay in the future but hasn’t worked out how to pay for yet), when you do that the real debt is a staggering £4.2tn. It also doesn’t include all the money the UK taxpayer ‘gave’ to bailout the banks, when you do that the figure is well over £2tn.
But for the sake of this analysis we’ll use the ‘massaged’ number of £1498bn. There has been as a very close correlation between debt and the gold price of the past 60 years. Simply put the higher the national debt the higher the price of gold.
First let’s take a look at the previous bull market in gold which in the UK started in 1966 and ended in 1980.
In 1966 the national debt of the UK was £31.34bn. In 1980 that number had risen to £98.2bn – a rise of 215%.
In 1966 an ounce of gold in the UK was just £12.50 (yes it really was that cheap) and by 1980 the gold price peaked at £371 – a rise of more than 2800%.
In 2000 the national debt was £345bn, today that number stands at well over £1tn, a rise of 190%. Gold in 2000 was around £185, today gold trades around £1070, a rise 478%, a much smaller rise than back in the previous bull market.
It’s probably more useful to look at the national debt as a ratio to gold to get a good idea of just what is going on.
We can see that from 1950 to 1970 the ratio between debt and gold was very stable, on average it took £0.45 of debt to cover 1 ounce of gold.
But this all changed in the 70s and the ratio started to rise rapidly. It peaked in 1980 when the ratio got as high as 3.78. There was then a steady decline until around 2000 when the ratio has started moving back up again.
But note that even despite the rise in gold over the past 10 years the ratio is still very low. This is because the debt increase has been rising faster than the rise in the price of gold. In fact over the past year or so we can see that there has actually been a downturn in the ratio.
So what sort of price levels would gold now have to reach to get anywhere near that 3.78 ratio level? Today it would take a gold price of around £4500 to get back to that ratio, but in a few years when the national debt is projected to hit £1.5tn it will take a gold price of more than £5,500 to match the ratio from the 1980’s.
www.gold4change.com
business@gold4change.com
