Sold on Gold?

“So extraordinary a rise in the market price of Gold in this country…pointed to something in the state of our own domestic

– The Report of the 1810 House of Commons Select Committee on the High Price of Gold

May’s reputation as unfriendly to stock market gains has long been noted as evidenced by the mantra to “sell in May
and go away.” The wisdom of that advice, at least for this year, was belied by the S&P 500 providing investors with a
return of 5%, the best performance for the month since 2009. That the love affair of investors for all things related to
AI had not yet reached the peak level of their passion was manifested by NVDIA’s 27% return for the month with
Apple joining in with 13% and even the normally pedestrian utility stocks rising 9% on the prospects for the increased
demand for electricity to power all of those artificial IQ points. Small Cap stocks modestly outperformed “the 500” and
even bonds rallied with many sectors of that market finding their way to close to break-even returns year to date.

Though having outperformed the S&P 500 by almost 40% in the past twenty-five years gold has been relegated to
being among the most forgotten of asset classes. Those proclaiming its virtues are not even dignified by being
compared to a species of animal, a bull or a bear, but that of an insect, “gold bugs.” Though the spotlight that once
shone upon it now increasingly shines upon bitcoin in the past eight months “the barbarous relic” has risen by
25 ½ % which begs the obvious question why? Historically gold tends to do well when inflation is rising, which it isn’t,
when interest rates are low, which they aren’t, and the US dollar is losing value which, at least in relation to most
other currencies, is not currently the case. Something is causing gold prices to rise at a very rapid rate and the
answering of that question might possibly offer some insights helpful to our understanding of a great deal more than
just that of the price of precious metals.

One of the most notable characteristics of life in the United States in the past third of a century has been the contrast
between the rate of growth of our wealth which has increased at a 3.3% real (adjusted for inflation) annual rate from
1990 through 2022 and the .45% annual increase in the median family income. This is further evidenced by the
performance of the US stock market which had a value equal to half that of our national economy in 1990 but was
50% larger in 2022. In other words, for whatever reason, the stock market has grown at an annual rate almost three
times faster than that of our economy.

Accompanying the rise in the stock market has been the growth of our federal government debt. From 1990 until the
Global Financial Crisis of 2008 that form of debt and the national economy grew at an approximately equal rate with a
level hovering near 60%. In the fifteen years since then federal debt has grown at a rate twice that of our economy
and is now at a level of 120%. In the past six months through April the US Treasury issued $16.8 trillion in new debt
with $15.7 trillion of it required to repay the debt that matured during that period. These are figures for six months.
Annualized, that level of debt issuance is now almost 25% larger than our national economy.

Since the onset of 2020 an acre of Iowa farmland has increased by 59 ¼% through 2023, the price of gold 55%
through May 31st and the median selling price of an existing home by 43 ½% through March. Could it be that the
underlying force propelling upwards the value of those assets is an effect not so much of the increase in their value
as it is the loss of the value of the paper money we are using to purchase those assets with? In other words, perhaps
the true source of the inflation we are observing may be an effect not so much of the rise in the price of what we are
purchasing but the decline in the value of what we are purchasing it with. And if this is true, then how should this
affect our perception of the future as investors if we are now experiencing a shift in “the balance of power” between
“paper” assets and those which are perceived as possessing real intrinsic value?

First, it may be wise to assume that the issuance of accelerating volumes of money is not likely to be reversed in the
next several years and so the sunny weather overhanging the current landscape of the financial markets may well
continue to exhibit a relative absence of storm clouds for some time. Second, it may also be wise to take note of the
relative sizes of those markets that may prosper in this future possibly unfolding scenario and those that may not. The
bond market is $130 trillion, the equity market $65 trillion, the gold market $14 trillion and bitcoin $1.4 trillion. Indeed,
it may well be the variance in size of the gold and bitcoin markets that explain the variance in bitcoin’s 100% return
the past three years and gold’s 24 1/4%. Perhaps though there is also an element of confirmation of the ever-present
relationship between risk and return.

60/40 portfolios returned 3 ¼% for the month erasing April’s decline and increasing year to date portfolio values to
their year-to-date highest level of 8 ¾%. The 60% equity share returned 4.7% with all sectors positive but with large
cap growth’s return of 6.4% notably outperforming value’s 3%. The 40% fixed income share returned 1% with modest
interest rate declines creating modest increases in the market value of those securities.

Mark H. Tekamp/June 6, 2024

Words For the Herd

“Genius abhors consensus because when consensus is reached, thinking stops. Stop nodding your head.”
–Albert Einstein

CNBC headlined on April 12th “Dow tumbles 475 points, S&P 500 suffers worst day since January as inflation woes
erupt.” Three days later UBS advised investors to prepare not for Fed rate cuts but quite the opposite suggesting
“Fed hiking rates to 6.5% is a real risk”. The financial markets had stepped into 2024 with 65% of market participants
expecting three or more rate cuts during the year. By April 18th that share had fallen to 20%, exceeded by the 30%
expecting none or actual rate hikes. The S&P 500, which started the month sporting a handsome 10.3% return, saw
that gain cut by more than half by April 19th though recovering modestly by months end with a decline of 4% for the
month but still +6% for the year.

The financial markets are doing their best this year to act in the role of Pinocchio to the Federal Reserve’s Geppetto.
Investors with memories reaching back to the start of 2023 may recall that virtually the entire fraternity of economic
forecasters was predicting the onset of an economic recession during the year. Instead, the US economy became the
focus of much admiring commentary with US economic growth rates of 2.7% for the year inhabiting a separate
universe from Canada’s ½% and Germany’s -0.3%. Let us occupy most of this commentary with thoughts on why this
was and, perhaps more importantly, the likelihood of its continuance.

It would be very difficult to discuss the current state of the US economy without focusing attention upon the federal
government’s fiscal response to the shuttering of much of our national economy in 2020. Looking at a chart of federal
spending reveals two massive increases, the 2nd quarter of 2020 and the 1st quarter of 2021. From that point federal
spending fell sharply remaining relatively stable until 2023 when it began to rise again, albeit at a more modest rate,
powered higher by the inflation-based adjustment in federal benefits payments (think Social Security). Those
increased benefits were paid for by higher levels of borrowing by the federal government with those increased
benefits then circulating through the US economy. This likely explains a great deal of our higher rate of economic
growth last year.

A bit more history but with this part measured in increments spanning decades. In the 1970’s and 1980’s the inflation
adjusted economy grew at an average annual rate of 3%. The 1990’s were a decade of transition and in the 21st
century to date we’ve seen that rate decline to 2%. There is much in economics that isn’t simple but explaining the
source of economic growth is. There are two factors that are the sources of that growth; the numbers of people
working and the level of their productivity. In the three years ending in 2023 our population grew .845% and
productivity .602% at an annual rate. That gets us to 1.447%. That is the rate we are likely migrating back to and any
notable variances to that rate of growth are likely to be temporary in nature.

A misfortune being experienced by those of our fellow citizens making their living in the real economy is their having
to pay higher prices for the goods and services they consume without an offsetting increase in their income to pay
those higher prices due to lagging growth in wages. The result will likely be lower levels of consumption, declining
rates of economic growth and falling levels of inflation. Those higher rates of growth for federal transfer payments are
now behind us so we’re likely to find the economic climate a good deal chillier than what we’ve been experiencing.
This is not necessarily a forecast of economic recession but growth rates starting with “1” likely will soon be upon us.
So, what about the financial markets? Intermediate to longer term interest rates may decline though possibly not by a
great deal. Think mortgage rates starting with a 6 and possibly 5. Prepare to say goodbye to 6% six-month certificate
of deposit rate “specials.” As unemployment rates begin to rise the fed will likely cut interest rates by 2% and possibly
more. The stock market, which is only just now starting to catch up with the future state of this reality, could rise by
another 15%. This is the world that investors inhabited from the time of the Global Financial Crisis of 2007-2009 to
the pandemic of 2020. Nothing has really changed as the final rippling effects of the pandemic subside and so this
may well be our future. For investors these are prospects they may well find pleasing in the experience.

60/40 portfolios which returned 7.8% in the first quarter gave back 2.35% of that return in April, ending the month with
year-to-date returns of +5.4%. The negativity was sourced almost solely by the previously discussed decline in the
equity markets with the slightly superior performance of foreign markets offset by the 6% decline in the small cap
space. Fixed income was slightly positive thereby protecting portfolios from experiencing more pronounced declines.

Mark H. Tekamp/May 8, 2024