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Source: IMF
*20th member - the European Union - does not have a debt-to-GDP ratio
Throughout history, debt levels over 90% of GDP are historically linked to significantly elevated levels of inflation. Specifically, when the ratio has met or exceeded 90%, inflation rose to around 6%, vs. the 0.5% to 2.5% range when it was below 90%. History also shows that the link is not simultaneous, yet the emergence of higher inflation has always been an eventuality. Heres a closer picture of the trajectory of US debt in relation to its GDP.
Total US government debt recently crossed the proverbial line in the sand and now equals 102% of GDP. This is higher than crisis-stricken Cyprus and Spain! Further, the Feds official figures exclude the nations swelling yet politically untouchable unfunded liabilities, namely Medicare and Social Security. If these figures are added to the equation, public debt levels skyrocket to astronomical heights. In reality, the level of debt carried by the US is so high that it will never be paid off, at least not in dollars with todays purchasing power. Instead, the Fed and Washington, and leaders from other countries, are devaluing currencies in order to reduce the burden of debt repayment. This is a central thesis to investing in gold: there is no way out of this level of debt overhang except currency dilution. The #1 catalyst for precious metals for the foreseeable future is indeed currency debasement. Its staring us right in the face, begging us to protect our assets and hedge our future standard of living by denominating a meaningful portion of our savings in gold and silver.
BEGINNERS GUIDE TO INVESTING IN GOLD WHEN WILL GOLD RESUME ITS UPTREND?
Because the Fed continues to pour money into the economy, its difficult to say for certain when gold will make a dramatic move. The historical record indicates that a surge in money growth doesnt impact economic activity until 9-18 months later. Add another 12 months or so for it to show up in consumer price inflation. In other words, the Federal Reserve is always driving with a loose steering wheel. Most of the experience behind those numbers is with relatively tame ups and downs in the business cyclenot the kind of financial violence weve been seeing over the last several years, which adds another variable. So while pinpointing the exact timing is difficult, what we do know is that there are clear and unavoidable consequences to wildly energetic money creation, including, sooner or later, rampant price inflation. Are there signals? The primary sign wont be inflows to ETFs (though they are indicators), or jewelry sales (the 70s bull market had nothing to do with bracelets), or even dramatic increases in the sale of physical bullion (we had that in 08 and gold was up 4.3%hardly meteoric). No, the payday rise in gold will occur when there is a significant shift in the psychology of the general public. That shift may already be under way, in spite of what the mainstream media claims. Dealers continue to report that demand for physical metal is at runaway levels and that they have a hard time keeping up. Central bankers were net sellers of gold as recently as 2009and are now heavy net buyers, lending strong support to prices. The US Mint and others have frequently suspended sales of their more popular coins, due to overwhelming demand.
e think this recent quote from Zhang Bingnan, secretarygeneral of the China Gold Association, will turn out to be quite prescient: The dumping recently of holdings in gold exchangetraded products by overseas investors may not prove to be a wise move.
And dont forget Chinese demand. Imports through Hong Kong, along with Chinas own productionit does not export any metalexceed the amount of ounces sold in GLD by roughly double, an astonishing fact that is overlooked by most journalists.
Institutional investors are starting to enter the gold market as well. The University of Texas announced that its endowment fund (the second-largest in the country next to Harvards) had taken possession of a billion dollars worth of physical gold. JPMorgan now accepts physical gold as collateral. Morgan Stanley reports that its preferred metal exposure is gold. And Deutsche Bank
*F or full disclosure, Casey Research is a founding member of and receives affiliate fees from the Hard Assets Alliance. Some but not all of the recommended companies have affiliate agreements with Casey Research. Casey Researchs recommendations are based on the value and competitiveness of the products and services offered by these affiliates, and its recommendations will not be influenced by the presence or absence of affiliate fees.
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SIZE MATTERS
There are different sizes of gold producers, each with its own level of risk and reward. Heres the breakdown:
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