Category Archives: personal finance

Real Yields and the Price of Gold

Not long ago, we were asked about how inflation affects the price of gold. It's something of an occupational hazard, where a lot of people assume that because we know quite a lot about how stock prices work, that knowledge directly carries over to things like commodities.

For most commodities, like copper, or oil, or turkeys, we would default to supply and demand analysis or dig into the factors affecting their cost of production to explain their changes in prices over time.

Gold falls into a different category that doesn't fit well into that basic mold. Aside from its use in jewelry, it's not used in great quantity to support any industrial applications like nearly all other metals are. Instead, it's used in financial applications, often as a hedge for inflation. Which is to say that when inflation runs hot, the price of gold will rise. But not always. Something else affects it as well.

That something else would appear to be interest rates, where the recent history for gold prices points to their having an inverse relationship with inflation-indexed interest rates. By inverse relationship, that means that as real interest rates fall, the price of gold tends to rise in response. The following chart shows the relationship we found between the daily closing spot price for gold and the daily inflation-indexed market yield of 10-year constant maturity U.S. Treasuries over the past 15 years.

Gold Spot Price vs Inflation-Indexed Market Yield of 10-Year Constant Maturity U.S. Treasury, 2 January 2007 - 17 March 2022

While the chart picks up the action at the start of January 2007, the pattern it shows began taking hold in 2006, coinciding with the deflation phase of the U.S. housing bubble. The inverse relationship we've identified only holds for the current period.

The most recent data point shown in the chart, for 17 March 2022, has the inflation-indexed market yield on 10-Year constant maturity U.S. Treasury securities at -0.71%, which is paired with gold's closing spot price for the day of $1,944.05. For reference, the nominal market yield for a 10-Year constant maturity U.S. Treasury was 2.20%. The inflation-indexed yield is negative because expected inflation rate over the 10 year period of the security is greater than the non-inflation indexed yield. That situation is consistent with a high price for gold.

After finding this relationship, we went searching for insight from other analysts who were already well familiar with it. Here's how Longtermtrends describes how gold prices work:

According to Erb and Harvey the correlation between real interest rates and the price of gold is -0.82. In other words, when real yields go down gold goes up. This correlation explains why inflation is gold's best friend while rate hikes are its worst enemy.

Here is a possible explanation for this relationship. Rising interest rates also mean rising opportunity costs of holding gold. Gold neither pays dividends nor interest. Thus, it is relatively expensive to hold it in the portfolio when real interest rates are high. On the other hand, when real yields are negative, holders of cash and bonds are losing wealth. In such a scenario, they are more prone to buy gold.

The Erb and Harvey study Lontermtrends references is from 2013, but it's good to see that the relationship we found is still very much in the same ballpark as the correlation they found. Just so, the price of gold is still governed by supply and demand. It's just that the demand for gold works quite a bit differently than it does for other commodities given its primary use as a hedge for negative real yields in today's financial applications.

References

Claude B. Erb and Campbell R. Harvey. The Golden Dilemma. Financial Analysts Journal. Vol. 69. No. 4. July/August 2013, pp 10-42. DOI: 10.2139/ssrn.2078535.

Federal Reserve Economic Data. Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Inflation-Indexed. Online Database (Text File)]. Accessed 19 March 2022.

USAGold. Daily Gold Price History. [Online Database]. Accessed 19 March 2022.

How High Will Gasoline Prices at the Pump Go?

How high can Americans expect to see the average price of a gallon of gasoline in the United States rise?

The specific answer to that question depends on a lot of factors, but the one that matters most in the current geopolitical climate is the price of crude oil. That price was already rising for American consumers because of President Biden's environmental policies that have constrained the production and supply of oil and gas in the U.S. But now, with the added factor of Russia's invasion of Ukraine in the developing geopolitical environment, crude oil prices are soaring because many expect economic sanctions being enacted against Russia will be expanded to include its oil exports.

That's significant because Russia is the third largest producer of crude oil in the world, following the U.S. and Saudi Arabia. Reducing the supply of crude oil in much of the world by what Russia currently supplies to it without any change in demand would be expected to cause prices to rise, which is exactly how oil prices have behaved.

Knowing that then, we're updating the math behind a tool we first presented in 2012, which answered the question: "Where Are U.S. Gas Prices Going?", which we've adjusted to account for today's slightly higher average state and local gas taxes. To use the tool, you only need to enter the price of Brent crude oil into it, which if you're accessing our site directly, appears in the upper right corner of this article (via Oil-Price.Net)! [If you're accessing this article from a site that republishes our RSS news feed, please click through to our site to access a working version of the tool.]

Crude Oil Price Data
Input Data Values
Price per Barrel of Brent Crude Oil

Future Price of Gasoline in U.S.
Estimated Results Values
Average U.S. Price per Gallon

Our default value of $118.11 represents the price of Brent crude oil at the end of trading on 4 March 2022, which corresponds to an average U.S. price of $3.85 per gallon, which is very close what AAA reported for the national average price for a gallon of gasoline on this date. Depending on where you live, you'll want to consider how state and local fuel taxes affect the price you pay at the pump, which can add quite a lot to the price you pay per gallon.

That said, even with that adjustment, the tool's results won't give you a perfect match. That's largely because of volatility in the price of Brent crude oil. Frequent fluctuations in the market price for a barrel of Brent crude oil makes it difficult to pin down the exact average price for a gallon of gas at the pump. Regardless, our tool will put you close to the right ballpark for determining what you can expect to pay on average for a gallon of gas. Whether the price of crude oil drops to $50 or rockets to $200 per barrel, it will give you a good idea of how much you'll pay for each gallon of petrol at the pump.

So go ahead, take our tool for a test drive to see what kind of price you can expect to pay at the pump using your best guess of what crude oil prices will be in the future. Or just do it using the latest "live" Brent oil price, because in our fast moving world, it's already noticeably different from what it was when we drafted this edition of the tool.

Gas Pump, by Dawn McDonald - Source: Unsplash (https://unsplash.com/photos/lBP2muAsD94)

Image Credit: Photo by Dawn McDonald on Unsplash.

Relative Affordability of U.S. New Homes Breaks Downtrend

December 2021 saw the relative affordability of new homes improve in the U.S., breaking an uninterrupted downtrend that began after April 2020 following the bottom of the coronavirus pandemic recession that month.

That improvement is mainly driven by a significant decline in the median sale price of new homes, which revised data indicates peaked at a record $421,500 in October 2021. Median new home prices then dipped to $416,100 in November 2021 before plunging 9.2% to $377,700 in December 2021 according to the Census Bureau's initial estimate.

The following chart shows how that unexpected drop in new home sale prices affects the trend for raw affordability, which indicates the portion of the median price of a new home would be covered by the annual income of the median American household.

Relative Affordability of New Home Prices | Annual: 1967-2020 | Monthly: December 2000 - December 2021

The impact of December 2021's apparent decline in median new home sale prices becomes more visible when we visualize a different measure of relative affordability that takes mortgage rates into account. The next chart features the mortgage payment for a median new home sold as a percentage of median household income in the period from January 2000 through December 2021, where December 2021's percentage shows the sudden improvement in realtive affordability:

Mortgage Payment for a Median New Home as a Percentage of Median Household Income, January 2000 - December 2021

If it holds, that's a rather remarkable reset. But that raises a question. How much of the sudden decline for December 2021's median new home sale prices is the result of noise from the Census Bureau's survey of new home sale prices?

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 26 January 2022. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 26 January 2022. 

Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [Online Database]. Accessed 1 February 2022.

The Biggest Grocery Store Chains in the U.S.

As part of our usual day-to-day analysis, we sometimes come across fascinating information that deserves attention all to itself. That's the case with today's data visualization featuring the 20 biggest grocery store chains in the United States by number of store locations.

Largest Grocery Store Chains in the U.S. by Number of Store Locations (as of 6 July 2021)

For the visualization, we've omitted several convenience store operators who operate large numbers of stores that are better known as places to refuel motor vehicles than they are as places to buy food and pantry items. We have however included drug store operators because they make a point to regularly advertise these kinds of grocery items in their weekly ads.

By far, the most numerous chains are represented by Dollar General with 17,266 locations and Dollar Tree with 15,685 outlets, which are followed by drug stores CVS with 9,960 outlets and Walgreens with 9,021 stores. Walmart ranks fifth by number of outlets, with 5,342, but ranks first in food sales.

But the largest supermarket operator (which omits Walmart under that classification) is the Kroger family of stores, with 2,742 locations across the U.S.

In the chart, we've highlighted the grocery store chains where you can regularly buy an iconic No. 1 "picnic" (or 10.75 oz) can of Campbell's Condensed Tomato Soup in red. That omits warehouse wholesaler Costco, which often carries Campbell's Chicken Noodle Soup (but not Tomato!). It also omits German-owned discount grocers Aldi and Trader Joes, as well as U.S.-based organic grocers like Amazon's Whole Foods and Sprouts Farmers Market, none of which carry Campbell's Soups (though you can buy it through Amazon's web site).

The biggest surprise for us was to find that Dollar General and Dollar Tree did not sell Campbell's condensed tomato soup in its most iconic packaging either. While these value-oriented grocery stores do in fact sell Campbell's Condensed Tomato Soup, they do so in larger volume cans. As a final personal finance tip, if you're looking for the most tomato soup for your money, you'll get the best value in buying the 15.2 and 14.3 oz cans of Campbell's Condensed Tomato Soup that these discount grocers carry in place of the 10.75 oz can.

Update 29 January 2022: We're happy to report that discount grocer Aldi is indeed a purveyor of Campbell's Condensed Tomato Soup's 10.75 oz. cans! We've updated the chart above to indicate that status (here is the original version of the chart that showed Aldi's bar as blue rather than red).

Reference

Supermarket News. Top 50 food and grocery retailers by sales. [Online Article]. 6 July 2021.

Your Paycheck in 2022

Berryman: Right of Way - Washington Evening Star, 15 March 1926, via Library of Congress

Welcome to 2022! With 2021 now receding in the rear view mirror, it's time to look forward to what your paycheck will look like this year after Uncle Sam's IRS agents prioritize your paying income withholding taxes to the federal government on the money you worked to earn.

As in 2021, we're starting with the assumption that a still significant percentage of Americans have not yet filed new W-4 tax witholding forms to take advantage of the simpler withholding rules that took effect in 2020. If that situation applies for you, our 2022 tool will accommodate your situation, but you will likely find the newer rules let you keep more of the money you earned from working. If you have updated your W-4 withholding form with your employer since 2019, that's the situation our tool is set up to handle by default, so you're set to go.

This year's tool is also set up to capture any big changes you may have made in your job. Is this the year that you'll crank up how much money you might invest in a pre-tax 401(k) retirement account at work? Does your employer offer health or dependent care pre-tax flexible spending accounts that you might use this year? What if you get a raise sometime during the year to cope with President Biden's inflation?

Our 2022 paycheck tool can help you find out how the answers to these questions can affect your paycheck and more! If you're reading this article on a site that republishes our RSS news feed, please click through to our site to access a working version of the tool. Otherwise, just start entering whatever numbers you want to consider for what your paychecks might look like in 2022.

Your Paycheck and Tax Withholding Data
Category Input Data Values
Basic Pay Data Current Annual Pay
Pay Period
Federal Withholding Data Filing Status
Have you filed a new IRS Form W-4 with your employer since 2019?
Number of Withholding Allowances (from your pre-2020 IRS Form W-4 if you haven't)
Extra Tax to Withhold per Paycheck (as requested on your IRS Form W-4)
401(k) or 403(b) Contributions Pre-Tax Contributions (%)
After Tax Contributions (%)
Flexible Spending Account Annual Contribution Data Health Care Spending Account
Dependent Care Spending Account
What if You Had a Raise? Desired Raise (%)

Your "Typical" Paycheck Data
Category Calculated Results Values
Basic Income Data Proposed Annual Salary (Including Raise!)
Typical Paycheck Amount
Federal Tax Withholding Amounts U.S. Federal Income Taxes
U.S. Social Security Taxes
U.S. Medicare Taxes
U.S. Additional "Medicare" Taxes (If Applicable)
401(k) or 403(b) Contributions Pre-Tax Contributions
After-Tax Contributions
Total Contributions
Flexible Spending Account Contributions Health Care Spending Account
Dependent Care Spending Account
Your Paycheck's Bottom Line
Take Home Pay Estimate Basic Net Paycheck Amount
... But, After Social Security's Taxable Income Cap Is Reached, It Becomes (If Applicable, for a Full Paycheck)
... And Then, After Additional Medicare Tax Income Threshold Is Reached, It Becomes (If Applicable, for a Full Paycheck)

Now that we've given you a sense of how much money you'll have withheld by the IRS in 2022 from each of your paychecks, we should note that there are some factors that can really complicate your withholding tax results depending upon how much you cumulatively earn during the year.

For example, once you have earned over $147,000, you will no longer have the Social Security payroll tax of 6.2% of your income deducted from your paycheck (or 12.4% if you are self-employed, where our tool above is designed for those employed by others). But then, by the time that happens, you'll have long been paying taxes on your income that are taxed at rates that are at least 10% higher than those paid by over half of all Americans.

There's also the complication provided by the so-called "Additional Medicare Tax" that your employer is required to begin withholding from your paycheck if, and as soon as, your year-to-date income rises above the $200,000 mark, which is one of the new income taxes imposed by the "Affordable Care Act" (a.k.a. "Obamacare") that are still in effect. Since the money collected through this 0.9% surtax on your income does not go to directly support the Medicare program, unlike the real Medicare payroll taxes paid by you and your employer, it is really best thought of as an additional income tax. That additional income tax is not adjusted for inflation, which means that those who must pay it are subject to 1970s-style income tax bracket creep, even though the tax was sold on the claim that it would be limited to very high income earners.

In the tool above, in case the amount of your annual 401(k) or 403(b) retirement savings contributions exceed the annual limits set by law, we've limited the results our tool provides to be those consistent with their statutory limits, and will do so as if you specifically set the percentage contributions for these contributions with that in mind. Our tool does not consider whether you might take advantage of the "catch-up" provisions in the law that are available to individuals Age 50 or older, which increase those annual contribution limits.

Elsewhere on the Web

There are other salary and hourly paycheck calculators like this on the Internet, including the very well done tools available at PaycheckCity.com. PaycheckCity's State Salary Paycheck Calculators allow you to determine the amount of state income tax withholding that will be taken out of your paycheck in addition to what the federal government will take out. Payroll processing giant ADP also has a salary paycheck calculator that will give you good results. Overall, we find the format of PaycheckCity's calculators to be more user friendly, but ADP's version has the benefit of having an all-in-one user interface.

Then again, if you live in one of the nine states that have no personal income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming), our tool above will provide you with a very good estimate of your actual take-home pay.

Previously on Political Calculations

We've been in the business of calculating people's paychecks (not including state income tax withholding) since 2005!