June 15, 2023

OCM Perspective – Gold and Debt Correlation

President Biden/Congress suspend U.S. debt limit for two years

Gold priced in U.S. dollars has a 92% correlation to Total Federal Debt Outstanding since Nixon closed the Gold Window in 1971. It is clear to us that the mark down of the dollar versus gold over the last 50 years is tied to the deterioration of the U.S. balance sheet and lack of fiscal discipline in Washington. In 2023, rising interest expenditures are only adding to the rapid rise in Total Federal Debt Outstanding.  U.S. budget deficit over the last four months is 4 times greater than 2022 at $701 billion as lower tax revenues along with higher interest expenses take its toll.

Congressional Budget Office’s (CBO) most recent ten-year projection has Total Federal Debt set to rise from $ 31.5 trillion to $52 trillion or 65% by 2033.  The issue is the CBO’s ten-year projections have been off by an average of 58% since 1996, which projects to a possible $82 trillion Total Federal Debt number in 2033 if the CBO remains true to form.  A scary thought and obviously something will have gone terribly wrong if the U.S. hits that number, be it inflation or a war.

With the ongoing move to “de-dollarize” by BRICS countries and other emerging economies, the foreign appetite for U.S. treasury bonds is declining at a time when supply appears set to accelerate.  In our opinion, rates will need to go higher to attract buyers, or the Federal Reserve will need to step in to be the buyer of last resort of treasuries to manage the yield curve to stop higher rates from imploding a leveraged global economy.  We believe gold prices may at a minimum hold the historic correlation to Total Federal Debt Outstanding if the Fed aggressively monetizes debt, potentially translating into dramatically higher gold prices from current levels.

A short article on Elements.visualcapitalists.com touches on the relationship of Federal Debt and Gold priced in U.S. dollars since 1970.  To read the article click here.

History of CBO Projections for reference:
(In Billions of Dollars)

Important Disclosures:

Investors should carefully consider the investment objectives, risks, charges, and expenses of the OCM Gold Fund. This and other important information about a Fund are contained in a Fund’s Prospectus, which can be obtained by calling 1-800-779-4681. The Prospectus should be read carefully before investing.

The Fund invests in gold and other precious metals, which involves additional risks, such as the possibility for substantial price fluctuations over a short period of time and may be affected by unpredictable international monetary and political developments such as currency devaluations or revaluations, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. The prices of gold and other precious metals may decline versus the dollar, which would adversely affect the market prices of the securities of gold and precious metals producers. The Fund may also invest in foreign securities which involve greater volatility and political, economic, and currency risks and differences in accounting methods. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. Prospective investors who are uncomfortable with an investment that will fluctuate in value should not invest in the Fund.
XAU Index is the Philadelphia Gold and Silver Index. It is an unmanaged capitalization weighted index composed of 16 companies listed on US exchanges involved in the gold and silver mining industry.
HUI Index also known as gold BUGS index is the NYSE Arca’s index measuring gold companies that do not hedge their gold production beyond a year and a half.

The S&P 500 Index, a registered trademark of McGraw-Hill Co., Inc. is a market capitalization-weighted index of 500 widely held common stocks. You cannot invest directly in an index.
Barron’s Gold Mining Index (BGMI) is an industry average of publicly traded gold mining stocks.

Investments cannot be made in an index. Unmanaged index returns do not reflect any fees, expenses, or sales charges.
Past performance is no guarantee of future results.

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Past performance is no guarantee of future results
“The Morningstar Rating for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.”
OCM Gold Fund: Advisors Class Best Fund out of 17 eligible investment companies for the three and five-year periods and 15 eligible investment companies for the ten-year periods ending 11/31/2022 based on consistent annualized total returns.

The Refinitiv Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers. The Refinitiv Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk adjusted performance measure calculated over 36,60 and 120 months. The fund with the highest Lipper Leader for Consistent Return (Effective Return) value in each eligible classification wins the Refinitiv Lipper Fund Award. For more information see lipperfundawards.com Although Refinitiv Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Refinitiv Lipper

Past performance is no guarantee of future results. There is no guarantee that the Fund will achieve its objective. Diversification does not ensure a profit or guarantee against loss. The prices of securities of gold and precious metals producers have been subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and political developments, such as currency devaluations or revaluations, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. The prices of gold and other precious metals may decline versus the dollar, which would adversely affect the market prices of the securities of gold and precious metals producers. Because the Fund concentrates its investments in the gold mining industry, a development adversely affecting that industry (for example, changes in the mining laws which increase production costs) would have a greater adverse effect on the Fund than it would if the Fund invested in a number of different industries.

The thoughts and opinions expressed in the article are solely those of the author as of June 15, 2023.

3153-NLD-06/15/2023

Funds are distributed by Northern Lights, LLC, FINRA/SIPC. Orrell Capital Management, Inc. and Northern Lights Distributors, LLC are not affiliated.