McClellan Chart in Focus: Deficits and Gold. This week’s chart compares the trailing 12-month federal deficit (as a percentage of GDP) to gold prices. By Tom McClellan


If you are a gold investor, then the one thing you want most is rising deficits.  Luckily for you, Congress appears to have granted just what you want.

Chart In Focus

This week’s chart compares the trailing 12-month federal deficit (as a percentage of GDP) to gold prices.  The correlation is not perfect, but it is pretty good over time.  The implication is that rising deficits should be bullish for gold prices.

That certainly was the case during the 2000s, following the supposed surpluses of the late 1990s.  Those were not actual surpluses, as the total federal debt actually went up in every one of those years.  But for federal bookkeeping purposes, they were counted as surplus years.  And gold certainly did poorly while that was going on.

After the 9/11 attacks, when the U.S. suddenly realized that the shortfall in military spending during the 1990s might not have been a good thing, suddenly the deficits started rising again.  And so did gold prices.  It helped gold that the Bank of England was ending its sales of central bank gold bullion in 2001.  Their sales of gold from 1999-2001 had a depressing effect on the gold market, and so stopping those sales gave the gold market some relief.

The generally rising deficits of the 2000s led to the gold price top in 2011.  Since then, Congress’ feeble attempts to live within its means have helped pull gold prices back downward.

But now Congress has given up on that silly old-fashioned notion of having a balanced budget, and gold prices are starting to rise again.  The revised tax tables for 2018 have not really started to have a big effect yet on the 12-month trailing total of federal tax receipts, but in the months ahead we can expect that factor to start bending the receipts line lower, and thus the deficit line higher.

If the demonstrated correlation of the past 40+ years continues in the future, then the presumptive higher deficit rates should be bullish for gold prices.  And that should continue right up until the point when Congress realizes that running a ginormous debt might not be a good thing, at which point we should see another major top in gold prices.  Congress does not seem to be anywhere near the point of making that realization, and so the message for the gold bulls is that it is game-on, and gold should be making a big general uptrend.

Tom McClellan
Editor, The McClellan Market Report

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.