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In my February 2011 article "How to Play Expected Inflation from the TIPS Spread", I wrote I was long SPY as one way to benefit from expected inflation.

"I also believe it is a good time to own equities including SPY, the exchange traded fund for the S&P500, for both inflation protection and income."

As long as the U.S. government spends more than it takes in and the Federal Reserve continues with its policy of buying the debt from the government at very low rates, I believe this relationship will hold true.

Like it or not, savers in "safe" investments like CDs and U.S. Treasuries are financing the economic recovery with a hidden tax levied with artificially low interest rates. With a budget surplus in January, the government is making progress in getting its fiscal house in order, which should, if it continues, eventually allow the Fed to eventually let interest rates normalize.

Many thought gold (and its exchange traded fund (NYSEARCA:GLD)) would be a better investment. Over the last year, SPY is up, and gold is down, as shown below. I believe one reason gold has not followed SPY up is because the government went from large deficits to a small deficit in December (See "SPY Soars As U.S. Borrows 32.2 Cents Of Every Dollar Spent In Fiscal 2013"), and now government showed a surplus last month. If this trend continues, there will be less borrowing in the future. Less borrowing means less need to print money by the Fed, and thus, less devaluation of the U.S. dollar relative to gold.

On Tuesday, February 12, 2013, the U.S. Treasury Department reported that the U.S. government had a budget surplus of $2,883 million for the month of January 2013 compared to a deficit of $27,407 million in January 2012.

The data for this table is from the above Treasury report in Table 1 "SUMMARY OF RECEIPTS, OUTLAYS AND THE DEFICIT/SURPLUS BY MONTH."

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Year-over-year, January receipts grew by 16.2%, while spending grew by only 2.9%, so January showed a surplus of $2,883 million.

This shows the information graphically: (click to enlarge)

Fiscal 2013 Deficit

This table calculates that the U.S. government has borrowed about 24.6 cents of every dollar it spent so far in fiscal 2013:

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Note: October 2012 was the start of fiscal 2013.

Don't Fight The Fed

All this borrowing by the government is supported by the Fed holding interest rates extraordinarily low. Adding in the Fed's programs of quantitative easing to buy U.S. debt and expand the its balance sheet gave the Fed its intended effect of "reflating the economy" by pushing asset prices higher. The exchange traded fund for gold is down about 4.3% over the past year, while stocks in the S&P500, counting dividends reinvested with this chart of SPY, are up over 14.9%.

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(SPY is the exchange traded fund for the S&P500/)

At least for the past year, the old adage "don't fight the Fed" has held true for SPY, which has significantly outperformed cash and gold. Could the lower prices for gold be telling us that the market believes the U.S. will continue to lower spending, increase tax collections and lower our deficits by having more monthly budget surpluses?

Notes

  1. SPY is the exchange traded fund for the S&P 500 Index.
  2. VTI is Vanguard's "Total Stock Market" exchange traded fund.
  3. VOO is Vanguard's new exchange traded fund that tracks the S&P 500 Index. It is a lower cost alternative to SPY. I own and write about SPY, as I have many years of data for it, but VOO could do slightly better than SPY over time because it has a lower expense ratio.
  4. Raw date in Table 1 below is from www.fms.treas.gov/mts/mts0113.pdf

(click to enlarge)

Disclosure: I am long SPY, and own the traditional index fund versions of VTI and VOO bought long ago in various taxable and tax deferred accounts. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: SPY Soars And Gold Falls As U.S. Borrows 24.6 Cents Of Every Dollar Spent In Fiscal 2013