So much is happening in finance now that keeping your mind around it is more than a little complex. We all tend to think: “If it does not affect me right now, then I do not need to be concerned.” or “There is nothing I can do about it anyway.” These assumptions can lead us down a very uncomfortable financial path, so constantly studying the markets and. world events can help us make wise decisions. In this fifth installment of this series, we are looking at an update to the market data and the view of three very different investment groups.
We now live in a world where the complexity of global finance is beyond the understanding of most of us (and the so-called experts). Financiers and governments like it that way. Protecting your finances now and into the future is your responsibility. No one cares more about your finances than you!
We now live in a world where the complexity of global finance is beyond the understanding of most of us (and the so-called experts). Financiers and governments like it that way. Protecting your finances now and into the future is your responsibility. No one cares more about your finances than you!
What is happening with gold?
There is, of course, a supply and demand component to determining the price of gold, but these are minor factors. While the price of mined gold is essential, the amount of newly mined gold pales compared to the existing stocks of gold in central banks and gold held by individuals. But the rise in gold prices above $2,000 per ounce makes gold mining at almost any scale worth the effort.
Gold is still a “safe haven” for most of us, and holding some gold seems right in times of uncertainty. Since World War II, there has been no time of greater uncertainty, and this has been reflected in the price of gold over the past few months as the conflict between Israel and Gaza heats up and drags on. In my opinion, how much gold to hold, if any, is driven by your age, financial condition, investing risk appetite, and investing time horizon. The same factors that drive all personal investment decisions apply to gold.
The price of gold has risen as the Israeli conflict goes into full swing and as the FED ebbs and flows in its decision-making on interest rates. Last month, gold sold for as much as $2,100 an ounce, and as I write this, it is back closer to $2,000. As the reserve currency, our dollar should weaken relative to gold because we are printing money we do not have to support Israel and Ukraine and pay the interest on our debt.
The Long View
The long view is for those of us who hit our peak earnings in the early 2000s. This view has the most relevance in the world of investing for Baby Boomers and, at the same time, covers the other two time periods.
In the long view, from 2000 until today, gold remains the only asset that outperformed all the markets and growth in the national debt over the whole period. But there has been a change in the “close second” asset, with the NASDAQ climbing almost as high. This is solely due to the performance of the stocks known as the “Magnificent Seven” (Apple, Microsoft, Tesla, NVIDIA, Amazon, Alphabet, Meta) since year-end. These seven stocks have some direct or indirect connection to the irrational exuberance over the short-term effects of AI.
Opinions are all over the place on whether these stocks have moved too far too fast or just getting started. It is anyone’s guess at this point because the speed of the implementation of AI is highly speculative.
The FED is swimming upstream in its efforts to rein in spending by Congress, but it may be a futile attempt to rescue the dollar against the winds of change. They are reining in their balance sheet and trying to offset the spending by Congress, but so far, the national debt is the silent killer. We can see in this chart the efforts by the FED to slow things down as they reduce the M2 Money Supply. Let us hope they have some magic we have not yet seen! But you only need to go shopping to feel the effects of inflation on all of us. Inflation has risen 19% since 2020, hurting most of the population, regardless of income level.
The price of gold relative to the January 2000 price still outperforms all other assets and more than kept pace with the national debt and the money supply. But few had this foresight and bought gold in 2000, so this chart is almost academic and a little sorrowful for most of us. In some ways, this chart best illustrates the missed opportunity for Baby Boomers. Only the NASDAQ comes close to gold’s performance, and only because of the “Magnificent Seven” tech stocks. But there is another concern that is just now being expressed. All the talk about AI has pushed some tech stocks way beyond their reasonable valuation. This phenomenon drives the NASDAQ, the S&P 500, and the DOW Composite. When these stocks return to earth, they may sadly reset all three indices.
The Medium View
Nothing has changed significantly in our Medium View of Markets, and it continues to say the opposite of the Long View. Gold rose from 2010 until today but did not exceed market growth in other areas. But the connection to the National Debt is still apparent. The FED’s attempts to shrink the M2 Money Supply are also more evident in this chart. Still, without severe corrections in the National Debt, the gold/National Debt connection likely continues upward. We are nearing a point of no return with the National Debt where it exceeds all other spending by the Federal Government. The challenge for the FED is to pull us back from the brink without triggering more than a mild recession.
We do not want to become another Japan with out-of-control spending and debt coupled with stagnant long-term growth in GDP. But we also have the same population issues that Japan and China have with low birth rates and a ballooning older population. Eventually, our population will start to decline without controlled immigration, making payments on the debt unsustainable.
Starting points for these calculations also matter. In 2010, the DOW had dropped from its 2008 high of 13,000 down to 10,000, so for these calculations, the markets are at a low starting point, thus making their growth seem stronger. Calculating from the 2008 highs would make the charts look more like the long view.
The Short View
Our Short View of markets now looks slightly more like the Medium View, with stocks outperforming gold. Gold is still correlated to the National Debt but has moved up more slowly. I believe gold will maintain some premium because China, Russia, and India are on a gold-purchasing mission in concert with their BRICS effort and need for stable reserves. Their effort to “dump the dollar” is gaining traction despite their internal financial struggles.
The “Magnificent Seven” stocks finally pushed all markets above the 2020 levels. The COVID handouts are running out and rising personal debt are the biggest headwinds for this group. But they will hit a wall, forcing either a significant correction or more handouts. The FED’s efforts to shrink the money supply and the rapid climb in the national debt are even more pronounced in this chart.
Central Bank Issues
The United States has the largest gold reserves, a holdover from the gold standard days and World War II. My best guess is that it just “feels right” for the United States, with the World Reserve Currency, to hold the world’s most significant quantity of gold.
China and Russia want to dethrone the US Dollar as the reserve currency, and they are doing everything they can in markets to make this happen. The BRICS consortium is pushing for additional membership, and just this year, they have expanded their membership and participation to at least forty-one countries. These countries now represent about one-third of the world’s GDP, so our government sluffing BRICS off as a sideshow is beginning to look like their “inflation is transitory” miscues. The past two quarters have seen gold purchases by central banks skyrocket, with consumer purchases supporting consumption through jewelry and investments.
Our sanctions against Russia have been largely ineffective, and our confusion about how to deal with China is just as perplexing. Neither situation builds confidence in the dollar or in our government. While safe for now, the dollar as the world’s reserve currency is under attack, and this will continue. For now, the dollar is still king, but it is only the king because of missteps by others. We are the best of the worst, which is not a comforting thought.
US Banking Issues
Our banking issues are directly tied to the sum of all these factors. My experience tells me that as consumers and corporations reach their debt limit, a recession or depression always follows. Consumer debt in the areas of credit cards, student loans, HELOC loans, and buy-now-pay-later loans is unsustainable.
I think any slowdown in the economy will bring more bankruptcies and defaults on office rentals. Even though the press has moved on to other issues, banks still carry massive unrecognized losses on bonds and cannot absorb big losses in other areas like loans without running out of capital. Banks will likely raise credit standards significantly to compensate for these challenges and clamp down on all lending. The Government is pushing banks for more capital, and the banks are pushing back. We can only hope the Government wins this argument and that we build a larger safety net.
Why Does All This Matter
Decades ago, our financial issues took place primarily on our shores. Today, our challenges are interconnected to all economies, and some nefarious players want to supplant our system of government with their own. These often see capitalism as a threat to their ability to control their people, and they seek to destroy it and us. It matters for our children and grandchildren, and we owe it to them to leave our Country and the world in better shape.
Resources Used in This Article
Forget FAANG, Meet the ‘Magnificent Seven’ Stocks Surging in 2023, by Mallika Mitra for money.com, Nasdaq.com, June 16, 2023.
Forget The Magnificent Seven. Focus On These Fab Five, by Ed Carson, Investor’s Business Daily, investors.com, February 5, 2024.
Gold Demand Trends Q3 2023, by World Gold Council, gold.org, October 31, 2023.
Magnificent 7 Stocks: What They Are and How They Dominate the Market, by Wayne Duggan, US News, usnews.com, January 16, 2024.
One chart shows how the ‘Magnificent 7’ have dominated the stock market in 2023, by Josh Schafer, yahoo!finance, finance.yahoo.com, November 15, 2023.
The Global Debt Bomb: Debt + Derivatives = Over 1 Quadrillion Dollars, from This $233 Trillion Bomb is Set to Blow, dailyreconing.com, by James Rickards, April 10, 2018, goldsilver.com, reprinted April 11, 2018,
The London Gold Fix: A Brief Guide, by gainesvillecoins.com, coinweek.com, August 3, 2022.
Who Really Controls The Gold Price?? The Answer is Quite Surprising, by SRSrocco, Gold-Eagle.com, April 28, 2017.
