I have been asked many times in the past week or so about how the new health care bill will affect gold prices in the future.  There is no direct correlation between government debt and gold prices.  Gold is a free floating instrument with no direct ties to the dollar, meaning they are not pegged.  However when the dollar falls in value, gold will rise in price due to this fall, because gold is priced in terms of dollars.

Government spending is what most people are afraid of and rightfully so.  The government is spending money at an alarming rate.  To put this into perspective, it took 204 years for our debt to reach $1 trillion; we will create another $1 trillion more debt in the first seven months of 2010.  The more debt the government piles on the more unsustainable it becomes.  At some point these debts have to be paid, refinanced or defaulted on.  The health care bill is estimated by the Congressional Budget Office to cost the U.S. $940 billion over the next 10 years.  But let’s put that number into perspective.  When Medicare was passed it was estimated to cost $12 billion dollars for the first 25 years.  The actual cost was $107 billion.  A miss estimate of 791%!  My point here is this; do you really think the health care bill is going to cost what they are estimating?  Probably not.  It will probably cost us much more that $940 billion.

So how does this relate to the price of gold?  The more debt we create, the more our foreign creditors become fearful that they will never get paid back on the money we owe them, which in turn makes them not want to buy our debt, which puts further pressure on the dollar.  People are putting money into gold primarily because they are scared about the dollar loosing value, or worse, a complete collapse.  As more and more people are putting their money into gold the more valuable it becomes.

Therefore, as the government adds more debt to our balance sheet, whether through bailouts, health care reform or the like, the dollar becomes less and less attractive to the foreign countries we depend on so much.  It has become customary for our government to spend money it doesn’t have.  This is inflationary and in my opinion will continue to fuel the gold market for years to come.