“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 Bullion
May’s reputation for being 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, as the S&P 500 provided investors with a return of 5%, the best performance for the month since 2009. The love affair of investors with all things AI had not yet reached the peak level of their passion, as shown by NVIDIA’s 27% return for the month, with Apple contributing 13%, and even the normally pedestrian utility stocks rose 9% on the prospects of 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 among the most forgotten asset classes. Those proclaiming its virtues are not even dignified by being compared to a species of animal, a bull or a bear, but rather to an insect, “gold bugs.” Although the spotlight that once shone upon it now increasingly shines upon bitcoin, in the past eight months, “the barbarous relic” has risen by 25.5%, 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 when 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 answering that question might possibly offer insights helpful to our understanding of much more than just 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 0.45% annual increase in 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 approximately equal rates, 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 by 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 the value of these assets upwards is not so much the increase in their value as it is the loss of the value of the paper money we use to purchase those assets? In other words, perhaps the true source of the inflation we are observing is not so much the rise in the price of what we are purchasing but the decline in the value of what we are using to purchase them. If this is true, then how should this affect our perception of the future as investors, especially since we are now experiencing a shift in “the balance of power” between “paper” assets and those perceived as possessing real intrinsic value?
First, it may be wise to assume that the issuance of accelerating volumes of money is unlikely to be reversed in the next several years, so the sunny weather surrounding the current landscape of the financial markets may 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 potentially 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 between the gold and Bitcoin markets that explains the disparity in Bitcoin’s 100% return over the past three years and gold’s 24 ¼%. Perhaps, however, there is also an element of confirmation regarding 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 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 slight increases in the market value of those securities.
Mark H. Tekamp