Gold And The Deficit Are Up As Stocks Trail

| About: SPDR Gold (GLD)

Summary

Gold is up 8.02% in the past year while SPY is up only 1.38%.

The US budget Deficit grew another $52.5 billion in May 2016 and is up 40% over May 2015.

So far, the US borrowed 16¢ of every dollar it spent in Fiscal 2016.

Total US Debt now stands at a record $19.2 trillion.

Gold has outperformed the S&P500 for the past year. Chart #1 below shows gold is up 8.0%. GLD, the ETF (Exchange Traded Fund) for gold, is up 7.5% which reflects losses to the bid/ask spread and the 0.4% annual expense ratio. SPY, the exchange traded fund for the S&P500, is up only 1.4% with dividends reinvested. Without the dividend, SPY would be down slightly.

Chart 1: 1-Year Chart of Gold vs. GLD & SPY with Dividends Reinvested

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Is Gold Beating Stocks Due to a Poor US Economy?

One way to judge family's financial health is to look at their monthly balance sheet. During good times, they should take in more than they spend to save for retirement and build cash reserves for bad times such losing a job or a medical emergency. Governments should be judged by the same metric. That is when the economy is healthy, deficits as a percentage of GDP should fall.

On Friday June 10, 2016, the US Treasury Department reported that the U.S. Government had a budget deficit of $52.5 billion for the month of May 2016. They also reported the total deficit now stands at $407 billion for fiscal 2016 year year-to-date.

Chart 2 shows the monthly information, including sources for receipts and outlays, graphically.

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Chart 3 shows the YTD information for fiscal 2016, including sources for receipts and outlays, graphically.

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Chart 4 from Excel shows a summary of the monthly data for fiscal year 2015 and 2016. The deficit grew by $40.3B or 11% over the past year, much higher than the last reported 0.8% annualized gain in GDP.

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Chart 5 calculates that the US Government has borrowed about .16¢ of every dollar it spent so far in fiscal 2016.

According to the US Treasury the total US public debt outstanding is $19.2 trillion.

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S&P500 vs. Gold

In my February 13, 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."

Since my 2011 article, the old adage "don't fight the Fed" has held true for SPY which has significantly outperformed gold.

S&P500 vs. Gold

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Summary:

For the long-term, I was correct to prefer stocks over gold, but gold has done much better during the last year.

Despite claims that the US economy is recovering, and it is certainly much better than at the depth of the financial crisis, the US deficit continues to grow much faster than GDP even as the Federal Reserve continues to keep interest rates artificially low to stimulate economic growth.

As long as the US government spends more than it takes in and the Federal Reserve continues with its policy of holding rates at historically low levels, I believe assets that produce income with the ability to raise prices with moderate inflation will do well.

Like it or not, savers in "safe" investments like CDs and US Treasuries are financing the economic recovery with a hidden tax levied with artificially low interest rates. This "wealth transfer" from a "hidden tax on savers" via lower rates has allowed the government to reflate the economy without causing high inflation, so far.

If the Fed raises rates, borrowing costs for the government, at least for short term borrowing, will certainly go higher. If the Fed doesn't walk the perfect tightrope to raise rates slowly to head off high inflation, or succumbs to political pressure to keep rates very low, gold and other physical assets could soar. Stocks will suffer with high inflation as companies won't be able to raise prices to match inflation and keep customers. Some think it could already be too late.

If the Fed makes the same mistake it made in the past, keeping rates too low for too long and we get massive inflation where they have to raise rates to double digits again to crash the economy and contain inflation, then gold should soar.

Has Gold Bottomed?

Is this a "dead cat bounce" for gold or is it time to move some money from stocks into gold?

Notes:

SPY is the exchange traded fund for the S&P 500 Index.

I trade SPY around a core position in my newsletter's " Explore Portfolio" and with my personal account. With dividends reinvested, my newsletter's explore portfolio holds 139.648 shares of SPY with a "break-even" price, after the 4/29/16 dividend, of $97.72. I also have the index fund version of SPY in both my newsletter's "core" portfolios.

VTI is Vanguard's "Total Stock Market" exchange traded fund.

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.

GLD is the exchange traded fund for Gold. With a current expense ratio of 0.40%, it may be a more convenient and less costly way to buy gold compared to buying the physical metal after commissions and storage costs.

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 have owned gold via GLD for trades but currently have no position. I own some physical gold, but less than 1% of my total investment portfolio and certainly much less than 1% of my net worth.

Disclosure: I am/we are long SPY.

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.