SEMI-MONTHLY FISCAL/MONETARY UPDATE – POLITICIANS BICKER, CONSUMERS AND INVESTORS HOLD COLLECTIVE BREATH
The general equity market was on the downside in September, up a little so far this month, probably based on the uncertainty relative to the election and the size (and nature) of the new stimulus program, still under negotiation between Steve Mnuchin and Nancy Pelosi. Gold bullion was down 4.3% in September, as the Fed Balance sheet “stabilized” around $7 trillion for a couple of months before taking off again. The gold miners were weaker in September, down a bit more than bullion. Both are still up substantially for the year.
Over the long term, the price of gold has closely tracked the increase in government debt. We’ve written almost continuously about the debt and the deficits and how increasing debt is a burden on the future economy. In simplistic terms, deficit spending (for an individual, a family, a business or a country) brings consumption forward at the expense of the future. It is just that simple and future consumption is currently being sacrificed at the altar of the can kicking (down the road) exercise.
A corollary to the current situation is that Federal Reserve money creation has been used to finance a very large portion of the US Federal deficit spending. As the table just below shows, the deficit in the current year has been $3 trillion for the eleven months ending 8/31/20. It seems like no accident that the Federal Reserve Balance Sheet has increased from approximately $4 trillion to $7 trillion currently, coincidentally exactly matching the eleven months of “stated” deficit.
But the story doesn’t quite end there. It’s true that the Fed, with the keystroke of a computer has created trillions of dollars to purchase US Treasuries, which has financed our massive spending deficits. The Fed has been a major buyer, for sure, but not the only buyer. In fact, the Total Public Debt of the US has gone up by almost exactly FOUR TRILLION DOLLARs in the last eleven months, a cool trillion dollars more than the stated deficit spending. Only with government accounting can the incremental debt not equal the deficit during the same period. Our website article on this subject, written in October, 2018, and provided to our investing partners as well, is provided just below.
In essence the reported monthly and annual deficits are just the numbers within the budget, and almost always the debt buildup is greater, most of it borrowed from the Social Security “lockbox”, now almost depleted. As our article two years ago pointed out, in the eleven years ending 9/30/18, the “extra” debt amounted to an enormous $3.24 trillion.
So the beat goes on, except:
All the numbers are an order of magnitude larger than just a couple of years ago. We all are well versed in the stated deficit, now over $3 trillion for fiscal 2020, but hardly anyone talks about the extra trillion of debt that has been incurred. A trillion dollars is still a great deal of money and the number of trillions is building rapidly. Just a matter of months ago, fiscal hawks were warning that the cumulative debt could approach $30 trillion by 2030, now more like the end of 2021, nine years earlier.
Many observers lose track, or lack perspective, over the actual results of various asset classes, including gold bullion. We all know that gold went from $35 to $850 in the 1970s after Richard Nixon eliminated the conversion of dollars into gold. From 1980 to 2000, with good reason, the price of gold suffered as Reagonomics (with Fed Chairman, Paul Volcker) and then Clintonomics kicked in and a strong economy with relatively modest inflation reduced the need for gold as a monetary safe haven. When US deficits increased dramatically in the early 2000s, with the cost of two wars, Y2k inefficiencies, and the aftermath of 9/11, gold started to perform well, and that has generally continued in the last twenty years. The chart below shows how gold bullion has performed in various currencies.
The chart is as of May, 2020, when gold bullion was up 14.3% in US Dollars and it has done even better since then. As you can see, 2013 was the one very poor year (out of 20). It is worth noting that our Partnership was down over 50% that year, since the gold miners typically go up and down more than the price of bullion. We have often pointed out that the upside performance of the gold miners has substantially lagged the price of gold bullion, and it was specifically the terrible 2013 from which we are expecting to recover. Aside from that observation, you can see that gold bullion in US Dollars has averaged a 10.7% increase annually, almost exactly the 10.3% average of all currencies. There is nothing shabby about the price performance of gold bullion as an asset class, and when the gold mining stocks catch up, the same observation will apply.
Keep all of this in mind as the politicians, economists and pundits predict a new growth phase for the US economy. The Presidential “debate” on Tuesday evening only reinforced our view that the partisan (adolescent) bickering, the legislative dysfunction, the spending and deficits will all continue indefinitely, and there is no “graceful” way out of this political, social and economic mess. Gold and gold related securities have historically protected purchasing power over similar stressful periods, and we firmly believe that this time will not be different.