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The Trillion-Dollar Correlation Chart

07/28/11 08:36:29 AM
by Matt Blackman

Want to know where gold and precious metals prices are going? Look to Washington for the answer.

Security:   GLD, SLV
Position:   Buy

Anyone who has read a number of my articles knows that I am a long-term precious metal bull for one simple reason -- the history of fiat paper currencies. One only has to read such books as "This Time Is Different" by Ken Rogoff and Carman Reinhart or "Fiat Paper Money: The History And Evolution Of Our Currency" by Ralph T. Foster to understand that we have traveled down this monetary policy gone berserk road countless times before. See Figure 1.

FIGURE 1: DAILY CHART COMPARING SPDR GOLD TRUST ETF (GLD) AND THE iSHARES SILVER TRUST ETF (SLV). Both have broken out of bullish flag patterns recently, and gold has just put in another new all-time high.
Graphic provided by:
Give government(s) the opportunity to create money out of thin air and they will abuse the privilege every time. According to Foster, fiat paper money (currency not linked to the price of a finite commodity like gold, silver, or copper) first appeared in Song Dynasty China in the 12th century AD. Each and every time it has occurred since, the outcome has been the same: an eventual decline in the real value of government-issued legal tender until it becomes worthless.

Figure 2 shows how difficult the US government found it to resist the urge to print money since Richard Nixon took the US off the gold standard in 1971. As the debt ceiling (and debt levels) has soared, gold has followed like an obedient hound. Try as they might to hide what is really going on behind the green curtain, bureaucrats cannot fool the yellow metal for long.

FIGURE 2: LINK BETWEEN THE DEBT CEILING AND THE PRICE OF GOLD. According to this chart, the reason for soaring gold prices can be found in Washington.
Graphic provided by:
As the debt ceiling debate rages yet again on Capitol Hill, so does the debate on where gold prices are headed. Gold bears cite the fact that the US dollar is due to rally because they believe that gold will crash. But this position shows a lack of understanding of fiat paper money history.

Unfortunately for all (with the rare exception with those with the majority of their assets and incomes based in gold or precious metals), history has been exceedingly unkind to civilizations in which governments have fallen prey to the siren song of fiat paper currency.

Getting transfixed by the theatrical antics in Washington could be likened to getting caught up in an absorbing shuffle-board game on the deck of the Titanic on the night of April 14, 1912, after it struck the iceberg. Paying more attention to the game than the iceberg may have seemed like a good idea at the time but shows a complete lack of understanding for the severity of the real dangers at hand.

It also highlights the risks of putting your faith in the powers that be. In the case of the ship, more than 1,500 souls were lost. And as long as debt continues to soar, gold will be as increasingly sought after as a lifeboat in turbulent economic waters.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at

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