Debt, Inflation and Gold

Historically gold and silver have been seen as an inflation hedge.  Their meteoric rise in the 70’s was during a period of strong inflation and arguably a lot of what drove the 2000’s bull run was the expectation of inflation, likewise the jump through the GFC was on the expectation of inflation due to the extraordinary money printing and zero interest rates undertaken to bail out the banks to prevent a total collapse.  Last week we discussed Jim Rickards points on the effect of real interest rates on gold.  Essentially the higher the inflation against rates, the lower the REAL interest rate and that historically drives up gold.  We’ve seen gold and silver come off since 2011.  This has been largely driven by the Fed TALKING up tightening.  They did eventually stop QE3 but they still haven’t done anything more than talk (as inevitably the situation got worse when they stopped printing money) and the recent rally in gold and silver is largely off the back of the growing belief this will not happen any time soon.  Indeed, as we mentioned in Friday’s Weekly Wrap, one Fed official even opened the Negative Rates prospect…

Jim Rickards (through his various best selling books and articles) is arguably one of the most connected, strategic, and logical thinkers out there.  He has just published another article via Strategic Intelligence that we have posted today and believe everyone needs to read.  From a macro economic point of view he puts the global debt glut and easy money we often write of clearly into perspective against gold’s current and possible role.  Jim is not what you would call a ‘gold bug’, he is more an analyst and commentator on currencies, his latest best seller being Currency Wars.  This makes his predictions on gold all the more robust.

For those who somehow still think Australia is immune to all this because we relatively cruised through the GFC, the stats below should be sobering.  In fact, likely because of the ‘lucky country’ cruise, we have embraced relatively more total debt since the GFC then nearly any other developed country.  We reported last week that the US had hit an eye watering 350% total debt to GDP.  Well, thanks largely to our debt fuelled splurge into property, Australia is at… 350%.  The info below has the US at 370% (variance might be on the period of GDP used)

  • US GDP is US$17 trillion x 370% = US$63 trillion total debt
  • Australia’s GDP is $1.5 trillion x 350% = $5.25 trillion total debt
  • Europe’s GDP is US$18 trillion x 450% = US$81 trillion total debt.

This sort of debt can only be addressed by extraordinary economic growth to pay it off (of which NOBODY is predicting), inflating it away (i.e. needs inflation), or default.  There is simply no other way.