Consider Your Perspective: A Chart – Gold vs U.S. Debt

I wrote a post 18 months ago about the importance of using perspective when looking at charts – changing your timeframe may illustrate flaws in your analysis or interpretation.   I was reminded of this phenomenon recently, as I’ve seen this chart from Nick Laird at Sharelynx posted in a number of places lately:

Gold vs U.S. Debt - narrow view

Gold vs U.S. Debt – narrow view


Now this chart, and the evolution of the narrative associated with it, serves as a perfect example of how one can fit a narrative or story to the data, and how one can spin a story without looking at the whole picture.

Let’s start back in February 2012, when “GoldSilverWorlds” posted an earlier version of this chart:

Gold vs U.S. Debt - from Early 2012

Gold vs U.S. Debt – from Early 2012

The commentary was:

“There is a positive, almost one-on-one correlation between the debt ceiling in the US (which keeps on increasing) and the price of gold in US dollars.”

This was part of a post designed to, in the author’s own words:

“prove that we are in a powerful long term bull market in gold and silver; it’s so powerful that you can easily call it a wealth cycle.”

Amazingly, the author added:

“If there is one thing we can advice, it would be to have a critical look at these charts. Can you deny these facts? If not, you will start seeing what is really going on in this world, on a global scale; it will change your world view entirely. For those who are familiar with these trends, it’s just another confirmation of what you already know.”

The problem is that the author was fitting the charts to his preconceived biases and failed to look at the whole picture – but we’ll get to that in a second.

Next,  let’s consider a recent piece of the narrative assigned a more recent version of the chart: from 9/17/14:

Gold vs U.S. Debt - from Sept 2014

Gold vs U.S. Debt – from Sept 2014

The narrative, by a different author, of course, was now:

“After Q1 2013 this correlation broke down according to the chart, wherein the US national debt continued to skyrocket and the US dollar gold price fell significantly. The end of Q1 2013 coincides with the smash down of the gold price in April 2013, which actually created a huge increase in demand for physical gold all across the world.

Looking at the huge divergence in the graph after mid 2013 between the continued growth in the US national debt and the drop and subsequent tight trading range for gold between $1200 and $1400, one can only conclude that gold is somehow being prevented from its previous job of accurately reflecting an explosive US national debt picture.”

So the “there is a 1:1 correlation” narrative has morphed into “since the correlation has broken down, it must be evidence of manipulation!”   For those familiar with Goldbuggery, this narrative shouldn’t be shocking.

Now let’s get some more perspective and figure out where the holes in both of the above commentaries are.   Here’s a version of the same chart on a longer time frame*:

longer view:  U.S. Debt Limit vs Price of Gold

longer view: U.S. Debt Limit vs Price of Gold

What do you notice?  Here’s my narrative:  there is not a correlation between the total U.S. Debt and the price of gold, and this chart clearly illustrates that.   There was a period where the two seemed to move together, and there was a much longer period where they did not. One can selectively choose start and endpoints that torture the data in an effort to further a narrative or confirm a bias, but when one does that, one should not be shocked when one’s conclusions turn out to be incorrect.

As Ben Carlson pondered recently in a post titled “How To Win Any Argument About Markets,” he gave the answer in his first sentence:

“It’s simple really. Just change the time horizon so it suits your stance.”

related: Perspective:  Gold, Platinum and Miners: Oh My!

How to Win Any Argument



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