Monthly Market Muhsings - July 2020

Markus Muhs - Aug 05, 2020
What about gold?
Monthly Markets & More
Another month into this "dreadful" year of global pandemic, market crashes and a suffering economy and the stock market yet again marked... a gain. Looking back at the months that have gone by so far this year, we've only actually had two negative months to five positives.
The Nasdaq is actually up 20% year to date and the S&P 500 is in the positive... just what in blazes is going on? Oil is up $80 since April! Okay, that last one is a bit cherry-picked data. Looking at the market table below, we're also seeing a move toward "risk on", with risk-off currencies (USD and JPY) losing out to risk-on, like the CAD and Euro.
Ultimately though, I think the most telling indicator on the Market Review table is on the very last line: Gold.
I do these monthly market reviews not because I think there is any relevance in what the markets do over an extremely short timespan such as a month, but because often when we look at the numbers holistically they tell us the overarching story of what's going on in the world.
The COVID-19 pandemic came unexpectedly and took a wrecking ball to a global economy that was starting to fire on all cylinders at the beginning of the year. I don't need to recount just how terrible the economic situation is now; you already know this. Just last week we saw U.S. GDP come in at what, -25%? -35% on an annualized basis? I can't remember, am too lazy to look it up, and just don't care. So, why are stocks up? The short answer is... they aren't.
I touched on this in a previous market update: that what we're really seeing, with stock market indices going up so much, is security price inflation. More money gets effectively "printed" and tries to find a place to go. Yields on bonds and near-cash securities are awful and guarantee a loss in real terms, so where does it go?
Currency per se, also, as the etymology of the word suggests, only has a current value. Fiat currency has no true intrinsic value; its value is simply based on a variety of geopolitical and economic factors, along with supply and demand. Supply seemingly is unending these days. The concept of "money printing" is a complex one, and even if you learned about economics or banking and finance in university, most of what you learned is theoretical and doesn't apply in the real world anyway. Ben Felix made a decent attempt at trying to explain it in his latest Common Sense Investing video, but you'll be excused if you still don't quite get it...
Getting back to gold, and a full disclosure here: I'm not a "gold bug". I'm not ideologically opposed to owning precious metals either, in fact back in 2014 I felt gold and silver were undervalued and started accumulating physical bullion personally. I bought a gold maple leaf in 2014 for $1480CAD and it only took six years for my thesis to pan out, as on Friday (July 31st) I sold that coin for $2576CAD. A tidy 74% gain (of course, when buying and selling it the bullion dealer took their cut too, usually around 2%).
That gold coin didn't pay me a dividend over those six years though and had I simply put that money into the S&P 500, buying when it was at 1900 ($2100CAD in 2014, with the Canadian dollar just a little weaker than par), and selling at Friday's close of 3270 ($4381CAD) I would have more than doubled my money. This doesn't include the dividend and on a discount brokerage account I could have bought and sold for a total of $20 in commissions, while only losing 0.05% or so each year in MER on an index ETF.
Speaking to the virtues of gold as a long term hold of value though, it has effectively done just that: hold value (not grow or provide an income). While fiat currency has lost wild amounts of purchasing power over the years, gold has more or less maintained its value, at least to a degree. Watch some old movie from the 1970s and you might marvel as to how a character regards $1000 like it's their life savings, or $20 like it's a significant amount of money. Today we almost can't conceptualize prices from back then unless we take out a calculator like this one. In 1975 the price of gold was around $150US per ounce, and $150 back then had the purchasing power of $718 today. It's within striking distance of what gold is worth today, and you'll have to account for the fact that gold ripped higher very quickly in the late 1970s.
It's said that gold has approximately held its value going back centuries or millennia, at least to some degree. During the time of Julius Caesar a Roman aureus coin contained a little over 8 grams of gold and a few of such (totaling $1000 to $2000 in today's gold prices) would buy a suit of armor. A few dozen (in the tens of thousands in today's dollars) would buy a chariot and some horses, and a few hundred (in the hundreds of thousands) would buy a home. None of this is exact or researched by me to any greater extent than googling approximately what things cost in ancient Rome, but what I'm getting at is that these costs were at least within an order of magnitude that makes sense relative to today's costs of things.
I did look up the Roman gold aureus here and along with info on the value of silver and the ratio of 25 denarii to one aureus can determine the true gold/silver ratio around the early decades AD to be around 12. Seems extremely low compared to today's ratio of around 80 (indicating the value of silver has held up much more poorly, my guess because we stopped using it in coinage entirely).
There is debate by historians as to what type of silver coins Judas received when he sold out his friend, but presuming they were Tyrian shekels containing 13.16g of silver a piece, this Wikipedia page estimates the blood money to be equivalent to around $250 (over $300 using a more recent silver price). If however, we account for silver's relative higher value back then and convert 12.69oz to just over an ounce of gold, it was more like $2000. Purchasing power was also much higher far away from the Roman capital so those $2000 worth of coinage were enough to buy the field in which Judas was buried. 
Anyhow, getting back to today's markets: instead of valuing the S&P 500 in a fiat currency whose supply has been increased by multiples in recent times, let's value it in gold. At the beginning of the year, with gold at $1520/oz and the S&P 500 at 3231 (Dec 31st close), it cost 2.13 ounces of gold to purchase one unit of S&P 500. At the end of July, with gold at $1991/oz and the S&P 500 "up" 1.2% year to date at 3271, it only costs 1.64 ounces of gold to buy one S&P 500. This puts the markets today in actual bear market territory, down 33% year to date!
I'm not stating this to scare you. If anything, you should take some solace in the fact that even though the markets appear to be up despite all the economic bad news, they're actually not up and aren't that expensive to get into. Key though is to understand that it's mostly dollars that are down, not markets or other assets that are up. By dollars I mean all currencies; it's hard to find any that are up significantly compared to the USD. 
After all the talk of gold, it's also not just a gold story either. Gold is just the most ready "currency" of sorts to gauge this depletion in value of the USD (and other dollars!) in. Gold isn't up 31% year to date, it's the USD that is down by about as much. This means the cash in your savings account or locked up in GICs/CDs has lost a third of its value!
The graph above shows just the past three months in an era of unprecedented monetary and fiscal stimulus. As much as gold (purple) is up, it only recently started outperforming steel (red), is barely keeping up with aluminum (pink) and is nowhere near keeping up with copper (green).
All of this is not meant to have you go out and buy bullion or mining stocks, rather it's meant to show primarily two things:
  1. When you look at stock and stock index prices, keep in mind that these are priced in currencies which bounce around in value almost as much as stocks themselves. They are ratios, not true values.
  2. In a time when governments are spending to no end and central banks are facilitating this spending by massively increasing money supplies, the worst asset you can own is that asset which is being increased in supply: money. Cash (including GICs, etc) as part of your net worth should represent only money that is to be spent in the next 5 years. Otherwise, you need to protect that money by converting it into some kind of assets which can maintain their value despite the plummeting value of said currencies. Stocks can be those assets, as they will in the future sell their goods and services for greater numbers of those depleted dollars and will be valued appropriately.



Markus Muhs CFP, CIM 

Investment Advisor & Portfolio Manager


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