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