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£Gold.The End or a New Beginning?

gold rising wedge

£ Gold. The End or A New Beginning?

gold rising wedge

Gold priced in British pounds has been marking out a rising wedge or pennant for the past decade. The chart  details the pattern. The purpose of this article is to try and ascertain what might happen once the pattern completes.

The apex of the pattern falls in 2024 and gold can be expected to break out to either the upside or downside some time prior to that and potentially within the next few weeks. The pennant is ten years in the making and covers a range of prices from £700 to £1600 per ounce. The breakout in either direction will almost certainly be substantial. By the end of 2024 we can predict that the £ gold price will be at a significantly level, but in which direction?

As a rising wedge or pennant a purely technical argument could be made for both a bullish or bearish interpretation. Technicals, as Is frequently the case, tell us that something substantial is about to happen, but leave us wondering what. To resolve the dilemma and hopefully gain greater insight we need to turn to fundamentals.

There are many fundamental drivers of the global gold price and the intermittent but dramatic rises that it has experienced over the past century. These generally all fall under the related headings of monetary debasement the growth of excessive government activity. In the case of the UK economy it is I believe the parlous state of public sector finances which provide the clearest driver for nominal gold appreciation.

The relationship between outstanding public sector borrowing and the £ gold price is detailed in the chart below. There are varying definitions of total debt and the figures used are taken from The House of Commins Library report on the subject. Unfunded future liabilities such as state and most public sector pension commitments are excluded from the totals.

annual government deficits in uk

Since 2000 public sector debt and the gold price have risen consistently and they do so almost in unison. The gold price is slightly more volatile. Gold, contrary to popular belief, neither lags nor foreshadows increases in the debt it simply matches them move by move. The correlation between the two is a remarkable 0.96 suggesting that a move in one value can provide a near perfect prediction of the other value. Clearly the correlation could break down at some point as everything works until it doesn’t. But given the close relationship  over the past two decades it is reasonable to expect it to continue for the next few years at least.

Given the way in which £gold price and total government debt move together in near perfect timing it’s not possible to argue that £ gold will fall in the next few months in anticipation of a fall in government debt in a few years’ time. If the £ gold price falls dramatically during 2024 then so must accumulated UK government debt.

The chart  details annual UK public sector deficits since 1999.

The UK government has run a deficit for every year since 2002. Whilst deficit levels have reduced from 2020 peak, the notion of £150 billion annual deficits suddenly turning into £200 billion surpluses within the next few months is preposterous given the historical context.

The necessary surpluses could only be achieved by either a dramatic reduction in government spending or a substantial increase in tax receipts- or perhaps a combination of both. The subsequent article “UK Fiscal Straightjacket and gold.” will examine why neither is about to happen anytime soon. This article will also use a possible path for UK public sector debt to suggest a corresponding and correlated route for the £ gold price.

At some point monetary collapse will, in my opinion, result in severely attenuated British state and that will benefit both our economy and society. At that point the £gold rally will be over as monetary discipline re-asserts itself. But we aren’t there yet and won’t be for a few years. So, my expectation is that the technical pattern in £ gold breaks out to the upside decisively at some point soon. There may be a false break down first, there may be a move up followed by a back test of the apex of the triangle. There will certainly be corrections along the way. But gold is about to move up substantially as priced in £s. Only of course what is really happening is that the £ will move decisively down as priced in gold. The cause as always is state profligacy.

Given the very close correlation between accumulated public sector deficit and the £ gold price it is theoretically possible to use the former as a guide to what might happen with latter. We examine that connection and what it means for the £ gold price in our next article

The above analysis is for education, discussion and debate purposes. It is categorically not investment advice and should not be interpretated as such. Any predictions contained within the analysis may prove to be correct but are just as likely to be completely wrong. Please act accordingly and take professional advice in connection with any investments you hold or may make.

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