There has been a multitude of notable, and often quite brave Gold price calls these last few years, many of which have since come true, and many more look likely to do so, fairly soon.
We’ve banded a few around from time to time, both near and longer term, including why Bullionvault’s Paul Tustain thinks $3800+ is fair value, explaining why in fact $5000 gold wont be a good thing, why the shadow gold price is $10,000 per Oz, amongst others, and here’s a great article explaining why it’s going way higher in terms of GBP Sterling over the next few years.
Last week we published this article including a Bloomberg chart tracking the rise in US debt vrs the price of gold. We thought we would take a look at correlation when done for the UK.
We will leave aside for the moment that the real size of the public debt in the UK is closer £4.8tn when you account for things like pension liabilities and bank bailouts, you-know stuff that any private company would have to show on their balance sheet, but somehow when it comes to the magic of government accounting they can just pretend they don’t exist.
It’s clear from the Bloomberg chart that in recent years the price of gold closely follows the size of the US debt. In its simplest terms the bigger the debt the higher the price of gold. We’ve decided to go back to 1950 and look at the long term correlation between UK debt and the price of gold.
First up the UK debt in £bn and the price of gold:
We can see that from 1950-70 there was a steady correlation between the price of gold and the national debt. Then when the 1970-80 bull market got going the price rose about four times higher than the national debt in £bn terms (£bn terms means £1=£1bn).
Then in 1994 the national debt rose above the price of gold in £bn terms – this trend stayed intact until 2008 where the rise in the national debt and the price of gold have pretty much being going up hand-in-hand ever since.
Also note the UK treasury predict that the national debt will be £1314bn in 2015 – if the price of gold keeps moving up in lock-step with the debt the price of gold will be about £1314 in 2015 – a 30% move from here.
However there is good reason to think that the price of gold will far outstrip the rise in the debt when we look at the historic national debt to gold price ratio since 1950:
First up we notice that between 1950-1971 (when the the world essentially came off the gold standard) the price of gold tracked the size of the debt pretty consistently. In 1950 the national debt of the UK was £25.8bn and the price of gold was £12.5 an ounce. So gold was roughly half the price of the national debt in £bn terms. By 1970 the national debt was £33.08bn and the price of gold was £15 – again gold was roughly half the price of the national debt in £bn terms.
But look what happened during the 1970-80 bull market – that ratio compressed. And by the time gold peaked in 1980 the ratio was 0.26. In numerical terms the national debt in 1980 was £98.2bn and the price of gold peaked at £371.
So the price of gold was roughly 4 times higher than the national debt at its peak.
We can see this ratio compression has again happened during this most recent bull market. in 2000 the national debt was £345.4bn and the price of gold was £185 – so the national debt, in £bn terms, was 1.88 times higher than the price of gold. By 2005 the ratio had dropped to 1.73. By 2009 the ratio was back to about 1:1 – where the national debt was £616bn and the price of gold was £620.
Today the ratio has dropped further and currently stands at about 0.93 – where the national debt is £909bn and the price of gold is about £980. If the ratio keeps falling over the next 4 years and matches the last bull market where the national debt was 0.26 the price of gold, then the £1314 projected national debt will be matched by £5050 gold price tag.
So how does this gold price fit in with our other analysis? When we compared the 1970-80 bull market to today we noted that gold would have to go to at least £4500 to match the % rise of the last bull market.
We also looked at the balance sheet of the BoE where at the moment for every gold ounce the BoE have, they have increased their balance sheet by £23,388 – a return to a 20% gold backing of the BoE balance sheet (the long term average from 1830-1950) would require a gold price of about £4670.
So using three very different methods we’ve managed to produce three very similar results for the final destination for the price of gold in the UK.
A 4 year price target between £4750-5000 should now be the minimum for all serious UK investors.