The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the views of the Georgia Institute of Technology or the Georgia Board of Regents.
Gold. Its relationship with mankind is a long and sometimes complicated story filled with power, greed, envy, influence, and of course, wealth. In the Bible, gold is used to represent God’s glory through the Ark of the Covenant (Exodus 25:7); Solomon’s wealth and prosperity (1 Kings 10:21); refined purity and holiness (Malachi 3:3); and the eternal Kingdom of God (Revelation 21:18). From the tombs of the Pharaohs to the plundered wealth of the Roman Empire, all the way to the Bretton Woods Agreement, gold has played a fundamental role in our historical narrative and monetary systems.
Today, there are various opinions about gold as an investment vehicle and/or a store of value. Some argue that it is a horrible investment as it generates no income, pays no dividend, and generally does not keep up with equities over the long-term. Proponents argue that in a world of fiat currency, gold is the only “real money,” is a store of value, and a hedge against inflation.
Regardless on which side of this debate you find yourself, there is no denying that the price of gold has increased significantly in recent weeks, and most Wall Street “experts” expect further growth over the next several months, with main stream forecasts of $2,700 – $3,000 per ounce within a year becoming more common.
What is the price movement in gold telling us? Quite a lot actually.
I have recently written a good bit about the rising U.S. debt-to-GDP ratio and its implications. Going back into the 1990s, the debt-to-GDP ratio and the price of gold have been very closely correlated. Looking at the graph below, the recent jump in the price of gold suggests that the gold market expects the U.S. debt as a share of GDP to continue to increase. Given our fiscally irresponsible leaders, this is a pretty safe bet. But this growth in debt is simply unsustainable.
Toward that end, there is another interesting relationship between gold and the inflation-adjusted rate on the 10-year treasury. Not surprisingly, the relationship is inverted…as the real rate on the 10-year treasury went down, the gold price went up. In other words, when fiat money becomes cheap, “real” money rises in value. However, in late 2022, we entered a situation where real rates continued to rise, but so did gold. So, why would gold prices go up along with rising bond yields?
Let me suggest two reasons. First, because as I said above, this growth in debt is unsustainable. The rest of the world understands this. Central banks certainly understand this. They understand that the only ways out of this debt spiral are an eventual outright default, or an implicit default through currency debasement. And the rest of the world is hedging against this eventual outcome. People tend to get nervous when they think the currency they are holding won’t be defended. So, instead of holding that currency, they will hold gold.
At the same time, we have a second reason. In mid-2022, the U.S. decided to weaponize the dollar against Russia. The world took note. If the U.S. was willing to weaponize the dollar’s status as the reserve currency against policies it didn’t like, perhaps holding dollars wasn’t a safe path for countries to follow. Ergo, again, central banks decided perhaps holding gold was a better way to protect themselves from the political whims of American politics. Regardless of what you may feel about Russia’s war against Ukraine, weaponizing the dollar ranks as one of the most stupid foreign policy moves ever undertaken. It won’t end the reserve status of the dollar immediately, but it has certainly accelerated the shift, and for now, it is supporting the increase in the price of gold. And without the dollar’s reserve status, the U.S. economy is doomed. It is how we export our inflation. It is how we consistently run irresponsible deficits. It is the underlying support for our standard of living. Frankly, it is everything. And without it, life in the U.S. will be very different.
Personal Income & Spending
Speaking of our standard of living, U.S. consumers just keep on spending, well beyond the level their income growth would suggest possible. In March, personal consumption rose 0.8%, while incomes grew only 0.5%.
Adjusted for inflation, personal consumption was up 0.3% for the month and disposable income was up only 0.2%, which is better than the decline in real disposable income posted in February. However, on an annual basis, real consumption is up 3.1% from one year ago, while real disposable personal income is up only 1.4%. Those numbers explain why the savings rate fell to 3.2%…the lowest it as been since November 2022. It also explains why consumer revolving credit continues to climb, and now stands at $1.34 trillion.
Personal Consumption Expenditures (PCE) Index
The Fed’s “preferred” measure of inflation – the Personal Consumption Expenditures (PCE) Index – was released today and, like other measures of inflation, it came in hotter than expected and showed that the war against inflation is far from won. The primary index jumped from 2.4% in February to 2.7% in March. Core PCE (excluding food and energy) came in above expectations at 2.8%. And prices in the service sector rose from 3.9% to 4.0%, as many service sectors have more pricing power and are able to pass along price increases to consumers.
Those numbers represent the year-over-year growth. But if you annualize the monthly increases in March, the numbers come in at 4.1%, 3.9%, and 5.0% respectively…more than 2x the Fed target rate of 2%.
New Home Sales
Once again, as with so much of the data released over the past two years, there is the headline, and then there what is actually going on with the data….specifically, REVISIONS. For example, the headline this week was “sales of new homes rose in March posting the biggest monthly increase since December 2022.” What really happened? The February number was revised to a DECLINE of 5.1% (from an original decline of only 0.3%) making the “jump” in March look much greater than the original numbers would have suggested. And you will be shocked to learn that 13 of the last 19 months of new homes sales data have been revised significantly LOWER from the original release in subsequent months.
Be that as it may, the number of new home sales for March was 693K on an annualized basis – much higher than the 669K expected and 8.3% higher than last year. The median price rose to $439K on a seasonally adjusted basis. However, the supply of new homes fell 5.7% between February and March.
With mortgage rates back above 7%, I would expect sales of new homes to show some weakness in the coming months. Last week we saw that both housing permits and starts tanked in March, which doesn’t bode well for new inventory coming to market. But that limited supply will provide even further support for increasing prices.
Durable Goods
As I have been reporting for months, manufacturing in the U.S. is in a slump and is only now starting to show some signs of improvement. However, the March data did not impress and the February data was…you guessed it…revised down to show a smaller increase than initially reported. (This is the 8th downward revision in the past 12 months.)
New orders for durable goods in March were up 2.2% from February. However, if you take out transportation goods, (which are highly volatile month-to-month) the increase was only 0.2% suggesting continued weakness in the manufacturing sector. High interest rates are taking a toll on business investment.
Shipments of core goods (non-defense capital goods excluding aircraft) were also up only 0.2% in March. This is notable because March is the final month of the quarter and that number helps in the GDP calculations. Frankly, as you can see below, shipments of core goods have not really moved in the first three months of the year, and aren’t likely to contribute much to GDP.
First Quarter GDP
Speaking of GDP…we got the durable goods numbers on Wednesday, and the very next day, we got the initial estimate of first quarter GDP (known as the “advance” estimate). Expectations were for 2.4% growth. However, as suggested by core durable goods shipments, the economy grew much slower at only 1.6%.
Notice the last three quarters….4.9%, 3.4%, and now 1.6%. The economy is obviously slowing which was the primary goal of 11 rate increases over the past two years. Clearly the consumer is slowing down and the effects of high inflation are starting to show up in higher income brackets as the first quarter earnings reports for luxury brands are underperforming. In addition, against all evidence to the contrary, government spending contributed only 2 tenths of one percent to the overall growth. Government spending grew at an annual rate of only 1.2% in the quarter, the lowest rate since the 2nd quarter of 2022 when the economy posted negative growth for the quarter.
The larger concern is that we could be entering a period of stagflation…where GDP growth is slowing while inflation is rising. The GDP price deflater jumped from 1.7% in the fourth quarter to 3.1% in the first quarter. The quarterly core PCE deflator (excluding food and energy) in this report jumped to 3.7% from only 2.0% in the fourth quarter! Inflation is starting to re-accelerate while GDP is slowing down. That is the very definition of stagflation.
Final Thoughts…
As a reminder, my next public talk will be at the LaGrange-Troup County Chamber of Commerce Early Bird Breakfast on May 14th. Coffee and networking will begin at 7:00am followed by breakfast and then the program will start about 7:50am when I will speak for about 25-30 minutes on the economy. The meeting will be held at the Del’avant Event Center which is located at 141 Main Street, LaGrange.
