Wednesday, March 2, 2011

Gold, Silver, Aluminum, and US Government Debt

Hopefully this post will inspire and confound you as I take you on a wild statistical ride. Let's start with gold.



As the debt rises so does the price of gold. Gold isn't exactly cheap at these levels but the debt is expected to keep growing. It is not at all hard to sympathize with the gold bugs on this one.



As the inflation adjusted value of the debt grows, the inflation adjusted value of gold does not grow as predictably though. I find that interesting. Gold now looks a bit like a bubble in this chart.

Let's repeat this process for silver.



As the debt rises so does the price of silver. Once again, silver isn't exactly cheap at these levels but the debt is expected to keep growing. It is harder to sympathize with the silver bugs, but I suppose if our debt continues to grow then perhaps they might eventually have a point if they are patient enough.



Now things are starting to act a bit strange.

As the inflation adjusted value of the debt grows, the inflation adjusted value of silver becomes chaos. Silver doesn't seem to care at all what the real debt does. No correlation. None. Silver's value has a mind of its own. I find that interesting. Silver very much looks like a bubble in this chart.

And lastly, let's turn our attention to aluminum. It would seem unlikely that we could hyperinflate without aluminum pulling its fair share. Right?



Once again, as the debt rises so does the price of aluminum. Aluminum appears to be cheap at these levels. Where are the aluminum bugs?

That brings us to the last chart in this series.



Note that as the inflation adjusted debt rises, the inflation adjusted aluminum price falls. As seen in the chart, perhaps even aluminum isn't cheap. It is well above trend. Modern mining equipment? Recycling? Excess aluminum production capacity? Hello deflation? I am not suggesting that the chart shows what will happen by the way. No consumer is going to be paid to own aluminum. I can guarantee that.

I'm just saying that there is a very subtle and strange aluminum story here, and it speaks of deflation. I've used the very same analysis on all three charts. They don't all seem to agree.

I would also once again point out that aluminum
tripled in price during the 1970s even though it makes up roughly 8% of the earth's crust.

See Also:

Dollar Death $piral: US Debt vs. Gold Price linear regression update

Source Data:
USGS: Historical Mineral Statistics
Kitco: Gold
Kitco: Silver
Kitco: Base Metals
TreasuryDirect: Historical Debt Outstanding – Annual
TreasuryDirect: Debt to the Penny
BLS: CPI

23 comments:

AllanF said...

What's with you and aluminum all the time? Just do like the bums and bring your cans to Oregon for the nickel deposit. And speaking of nickel, a nickel chart if you please. :-)

Stagflationary Mark said...

Don't be bashing my aluminum! Hahaha! ;)

Aug 30, 2007
Homeless Man Sets Aluminum Can Record

A local homeless man known only as "Fuzzy" set a Colorado Springs record today by collecting 10 pounds of recyclable aluminum cans. Fuzzy then sold his overflowing bag of cans to a local recycler, which earned
him a crisp 20-dollar bill. The previous record was 9.5 pounds, set in 1993 by a man known as "Slim." Fuzzy claims to have created more room in his bag by stomping on the cans prior to placing them into the garbage bag.

Stagflationary Mark said...

AllanF,

And speaking of nickel, a nickel chart if you please.

I tried to fulfill your request but USGS is jammed with traffic apparently.

I had a heck of a time downloading any of this data today. I had to resort to updating my 2008 aluminum data from a USGS pdf.

I'm off to do other things. I will do some nickel charts soon though. Count on it.

Here's an interesting nickel article.

July 8, 2007
What’s Happening With Nickel?

The recent dramatic fall in the price of nickel may be indicative of a real surplus in nickel stockpiles that has been ongoing for some time. Nickel supply/demand calculations fail to include hidden stockpiles due to the complexity of measuring their quantity. Large institutional traders could utilize this oversight to build large commercial inventories thereby. This creates artificial demand on the public stockyards and causes an underestimation of the actual world nickel supply amidst a price increase. The recent price spike to US$24/lb may have been engineered by such a scenario.

The world is my casino. I shall not want.

Sigh.

Mr Slippery said...

Mark,

Just fantastic charts. I have a few comments, worth exactly the price paid ;)

First, I don't think it makes sense to go back before 1971 on gold because the government set the price of gold before that. Once gold was allowed to float, I think we can identify three distinct periods:

1971-1980: high inflation, rising gold prices
1981-1999: high interest rates, falling gold prices
2000-current: structural deficits, rising financial systemic risks, rising gold prices.

I think the current period will end when the dollar reserve system is replaced and the global economy is rebalanced. At least 2 years away, maybe many years away.

Now, silver is more complicated. Central banks don't hoard silver so it is more of a commodity despite a long monetary history. Commercial use is high, even though it is no longer used for photography. What makes silver as an investment so volatile is that it is a very small market. There is a lot of above ground silver, but the amount available in bar and coin form is much smaller than the commercially used silver.

The huge spike in 1980 was from Hunt Brothers manipulation, attempting to corner the market. The current rise, who knows? There are rumors but I can't confirm. I do think it can be used as money of last resort, but I sold some physical last week and plan to sell more next month if the price goes up again.

Aluminum? Pure speculation on my part because I know nothing about the market, but the natural state of economy is deflation due to productivity gains. It looks like deflation is getting the best of aluminum, which is good news for consumers.

Slip out.

Stagflationary Mark said...

Mr Slippery,

????-1970: high real yields, no gold bubble?
1971-1980: low real yields, gold bubble?
1981-1999: high real yields, no gold bubble?
2000-????: low real yields, gold bubble?

I think it may go on a long time, but I do eventually expect gold to revert to its inflation adjusted average. In other words, in the long run I expect the gold to toilet paper price ratio to drop. Either toilet paper rises, gold falls, or both.

Like you say gold's price was fixed before 1970. I don't think it would affect the charts much though. The 1970s start on the far left anyway thanks to the exponential growth of the data sets. A gold to debt ratio would not have that problem though. That's why I generally do that instead.

Stagflationary Mark said...

I just got the nickel data downloaded. I'll put up some charts tomorrow.

Anonymous said...

You have failed to take into account the diabolical plastic cartel and their control of the aluminum market. Please write your CONgress-critter today to end this travesty and help Fuzzy obtain a fair price!!

Ben Bernanke said...

As the debt rises so does the price of gold.

You have this backwards. As the price of gold increases, the debt increases. This is the reason we need to suppress the price of gold.

Charles Kiting said...

As the inflation adjusted value of the debt grows

Isn't this like saying the inflation adjusted value of inflation?

Anonymous said...

The higher gold prices go the more margin debt it takes to maintain them.

dearieme said...

British headlines for your delectation:

■ Stagflation 1: Chris Dillow explains why the latest economic data have increased the chances of high inflation and low growth.

■ Stagflation 2: if inflation erodes bond coupons and weak growth crimps share prices, ....

Mr Slippery said...

Mark,

I know you are big on reversion to means, and usually that is a good strategy. But reversion can occur by commodity prices coming down or the value of the dollar coming down. Either one, or a combination can get things back to long run averages.

Barry Eichengreen suggests in this article that the dollar will lose 20% permanently by losing reserve currency status.

I've heard numbers of up to 40%, but I don't have a strong opinion myself. It may not happen in our lifetimes, but based on the depth of the structural problems in the US, I think it will.

In other words, some part of these price rises could be more or less permanent, with the reversion coming from both price drops and a permanent loss of dollar purchasing power.

Or not. ;)

Stagflationary Mark said...

Anonymous,

You have failed to take into account the diabolical plastic cartel and their control of the aluminum market. Please write your CONgress-critter today to end this travesty and help Fuzzy obtain a fair price!!

Very amusing!

Ben Bernanke,

You have this backwards. As the price of gold increases, the debt increases. This is the reason we need to suppress the price of gold.

Nice! Maybe you need to drop gold out of helicopters? ;)

Charles Kiting,

Isn't this like saying the inflation adjusted value of inflation?

The Japanese might beg to differ!

dearieme,

Two stagflations for the price of one?

Stagflationary Mark said...

Mr Slippery,

You were caught in the SPAM detector. I pulled you out of harm's way.

I believe that the dollar's purchasing power will go down over time, just as it has for the last century.

It's all about the timing of it and the relative value of non-dollar assets to me.

Warren Buffett was on CNBC recently and he had this to say. He'd rather own all the farmland in the USA than all the gold in the world. I'm with him on that one.

getyourselfconnected said...

"Warren Buffett was on CNBC recently and he had this to say. He'd rather own all the farmland in the USA than all the gold in the world. I'm with him on that one."
Very interesting idea. I feel a Thursday night poll coming on later.

Stagflationary Mark said...

GYSC,

All that farmland would make his railroad bet good too. I think the game is called Monopoly.

We can't all live on Baltic Avenue. Sigh.

Mr Slippery said...

Warren Buffett was on CNBC recently and he had this to say. He'd rather own all the farmland in the USA than all the gold in the world. I'm with him on that one.

OK, I am not a Buffett or CNBC fan, but I also agree with that.

Ben Bernanke said...

Nice! Maybe you need to drop gold out of helicopters? ;)

We're talking to some Chinese coin makers today.

Charles Kiting said...

The Japanese might beg to differ!

Mugabe doesn't have any debt!

Charles Kiting said...

Warren Buffett was on CNBC recently and he had this to say. He'd rather own all the farmland in the USA than all the gold in the world.

Proving he's a feudalist at heart.

Stagflationary Mark said...

Ben Bernanke,

We're talking to some Chinese coin makers today.

Fantastic. If we don't keep expanding the trade deficit then the wheels fall off.

jeff said...

Gold correlation to chinese income is quite good. I tried to plot gold vs the US trade deficit (being our deficit enriches china) but I can't get it look good.

Stagflationary Mark said...

jeff,

June 26, 2012
China's middle-class boom

One wonders how much longer it will continue.