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05.17.2024 by David M. Smith

Good Inflation News and is Gold a Good Investment?

For the first time in months, inflation numbers came out that were OK. Inflation had been trending slightly higher the last few months, leading the Federal Reserve to delay cutting short-term interest rates. The Consumer Price Index (CPI) rose 0.3% for April after being up 0.4% for both February and March. Economists had expected it to rise 0.4% so it came in slightly below expectations. Over the last year, the CPI is up 3.4%. The index which excludes volatile food and energy also rose 0.3% for the month and is up 3.6% over the last year. It was a good, but not great, sign that inflation is not marching higher. The Fed will probably need to see a couple more months of data before they have the confidence to start lowering rates, which is expected to be in September. Reuters  Bureau of Labor Statistics  WSJ

Producer Price Index Surprise: The Producer Price Index (PPI) measures the change in the prices paid to producers of goods and services while the CPI measures the change in prices paid by consumers. The PPI for April came in at 0.5%, which was higher than the 0.3% expected. That was not good news but what was good news and very unexpected was that the March PPI was revised from a positive 0.2% to negative 0.1% - showing mild deflation. Revisions are made to inflation indexes due to late data submissions, updating seasonal adjustment factors, and correcting for errors which gives a more accurate reflection for that month. Many economists hone in on revisions to get a more accurate view of trends that are missed in the first month’s measurement. Despite the high PPI for April, it was offset by the revision in March, and the mixed results made for a neutral report. PPI Definition – Investopedia CNBC

Financial Planning/Investment Strategy Corner:

Gold is Glittering, but is it Worth Investing in? Gold is often an investment held for security in times of economic instability and as an inflation hedge. Recently, the price of gold has been going up. What may be driving the price now are Chinese buyers. Real estate has been the destination for most Chinese savings, but that market has cratered. The China stock market has historically been volatile and has been down in recent years, so Chinese investors are turning to gold. China’s Central Bank is also buying gold and reducing its exposure to U.S. Dollars, possibly as a preemptive measure to avoid frozen accounts like the Russian Central Bank faced after the Ukraine invasion. NYT - China Is Buying Gold, Sending Prices to Record Highs

The U.S. currency went off the gold standard on August 15th, 1971. Since then, the price of gold has been allowed to “float” on its own accord. At the time, it was priced at $35 per ounce and as of midweek, it was priced at $2387 per ounce. If you do the math on 52.75 years of performance, the annual return on gold has been 8.3%. That is a pretty good return though it lags the stock market’s long-term historical return of approximately 10%.

Lately, the price of gold has been on a tear. Using a gold ETF for performance, gold is up 27.20% from October 1st of last year until mid-May which beats the S&P 500 Index ETF which is up 23.29% (see chart below).

FAI 05.17 (1)

Is gold a good investment? With a return of over 8%, should it be considered for a portfolio? Well, there are some real challenges to holding gold as an investment. For one, there can be long periods where gold does not perform well. From the beginning of 2012 to the beginning of 2020 the price of gold went down and the gold ETF was down almost 6% over that period (see the next chart). And during that time, there were no dividends and no interest, because, well, it’s a piece of metal. At the same time, there is a cost to holding gold in a portfolio, either by paying management fees or paying a custodian to hold bullion. You can hold onto it yourself, but you better not lose it, because it is untraceable. I don’t know of many investors who would have the patience to hold onto an investment that did nothing for almost a decade.

FAI 05.17 (2)

The best thing about gold is that it is highly uncorrelated to anything as if it has a mind of its own. In 2022, when both the stock and bond markets had big down years, gold was barely down (see the next chart). But inflation had been raging for two years at the time, why hadn’t gold gone up then if it was a hedge against inflation? Who knows, as I stated, it has a mind of its own which makes it highly uncorrelated and frustrating at the same time. If you hold it as an investment, your only hope is that someone will buy it for more than you did when you want to sell it – like the Chinese buyers of today. But the buying spree could end tomorrow and it could be a long time before holders of the shiny metal get higher prices.

FAI 05.17 (3)

Trade War Redux? The U.S. and China were in a trade war a few years ago, going toe-to-toe with tariffs and restrictions. Things had calmed down in the last couple of years, but with China being accused of starting to dump cheap goods on the rest of the world (RSWA Blog), tension is building. During the last round of trade wars, announcements of new tariffs created turmoil in the markets. We may have to brace ourselves for more of the same soon. With a Presidential election looming, tough talk and actions on China are sure to be in the headlines. Greg Valliere  

Quick Hits:

  • There’s a new COVID variant – what will that mean for Spring and Summer? NYT
  • Can weighted blankets, eye masks, and pillows help solve sleep problems? WSJ
  • Summer is right around the corner, time to order those summer books! goodreads
  • Best cheap summer vacations for 2024: U.S. News
  • A lot of what we’ve heard about the stress hormone, cortisol, is wrong: WSJ
  • Tornado Alley may have shifted to the east:

Spring Hiking: In New England, when the weather warms up, no one wants to stay inside! Many enjoy finally getting outside and doing some hikes. Maine and New Hampshire have great hikes with incredible views, so be sure to get out and enjoy them! But be careful out there. Weather that is warm at the base of mountains may be very different as you get higher. Also, storms can blow in very quickly making conditions difficult or even life-threatening. The WSJ even had an article on how dangerous hiking can be on Mt. Washington. So have fun getting some fresh air and taking in the scenery, but be safe. Happy hiking! Maine Spring Hikes - NH Hikes - The Wild Trek   WSJ

Spring hiking tips - The Manual

Quote: “Spring is a time of plans and projects.” Leo Tolstoy, Anna Karenina

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