How to Read This

This commentary is written for our current clients who are positioned in the KFSC Risk Managed Strategies. It is our diagnostic read of market conditions, not investment advice and not a forecast. We do not publish forecasts. The pages that follow lay out how we see the financial system today, using sourced, verifiable data, explain the mechanics we believe drive the numbers, and walk through conditional scenarios that depend on decisions not yet made. Every figure is tied to a numbered source at the end of this commentary.

Each section ends with two things: a one-sentence Client Translation written for our clients in everyday terms, and a condition rating. Only four ratings are used:

The reading frame for everything below is the firm’s standing doctrine:

Models Diagnose. Advisors Decide. Portfolios Implement.

In very simple terms, in our view - we continue to see the system running a low-grade fever. Not a crisis: growth is positive, employment is steady, credit is flowing, and the S&P 500 sits less than three percent below its record. But not normal either: inflation has re-accelerated to 4.2 percent, the money supply is back at record highs, federal debt is growing almost eight percent a year, equity valuations sit in the most expensive category our valuation sources track, and the funding plumbing beneath the Treasury market has already shown early strain. A low-grade fever is not an emergency. It is a reason to take the temperature often, which is exactly what this commentary does. ^{[4][2][3][5][6][11]}

Chart 1. Cumulative total return, January 2, 2020 to June 12, 2026. Quotes are intraday June 12, 2026. Source: LSEG. All three series are rebased to zero on January 2, 2020 so the comparison starts from the same line. ^[1]

Here is how we read the movement, starting with what actually happened. From January 2, 2020 through the intraday quote on June 12, 2026, silver returned 271.0 percent, gold 174.9 percent, and the S&P 500, with dividends, 150.1 percent. Both metals outpaced the broad stock market over the full window, and for most of the period they did it quietly: through late 2024 the three lines were tightly bunched. The separation came in 2025 and went vertical into late January 2026, when gold touched a record $5,399 per ounce on January 28 and silver hit its own record the next day. ^[1]

Then the air came out. From the January 28 peak to June 12, silver gave back 42.7 percent and gold 22.2 percent, while the S&P 500 sat just 2.8 percent below the record it set on June 2. So, as we see it, the full period and the most recent months tell two different stories at once: metals have been the stronger asset class since COVID, and metals have also just absorbed their hardest correction of the entire period while stocks barely noticed. ^[1]

Chart 2. U.S. M2 money supply, weekly, not seasonally adjusted, December 2019 through May 4, 2026. Source: Federal Reserve H.6 release, republished by GuruFocus. Shaded band marks the April 2022 to October 2023 contraction. ^[2]

M2 is the broad measure of money Americans can actually spend: currency, checking, savings, and retail money funds. In the first week of January 2020 it stood at roughly $15.5 trillion. As of May 4, 2026 it stands at $22.9 trillion. That is an expansion of about $7.4 trillion, or 47.9 percent, in six and a half years - and the series touched a record $23.1 trillion in early April 2026. ^[2]

The path matters as much as the endpoints, and it had three distinct phases. Phase one, 2020 into early 2022: the COVID surge, when nearly the entire expansion happened - M2 ran from $15.5 trillion to a peak of $22.1 trillion by April 2022. Phase two, April 2022 to October 2023: the giveback, when M2 fell roughly $1.5 trillion to $20.6 trillion. Sustained declines of that kind are very rare in this data; the last comparable episode in the historical record dates to the early 1930s. Phase three, late 2023 to today: the rebuild, with M2 growing about 5.3 percent year over year and setting new records this spring. ^[2]

Two companion measures keep the headline honest. First, inflation-adjusted M2: in real purchasing-power terms, the money supply remains 10.6 percent below its December 2021 peak, because prices rose faster than the money stock during the contraction years. Second, velocity, the rate at which each dollar turns over in the economy: it collapsed to 1.10 during COVID and now sits at 1.41, still modest by pre-2010 standards. More money exists than ever, but each dollar buys less than it did at the 2021 peak and moves through the economy at an unhurried pace. ^[8]

One framing correction we make often, because our clients ask: the money creation machine of 2020 and 2021 is not running today. The Federal Reserve’s own monetary base is shrinking, down 4.6 percent year over year as of April. Current M2 growth of roughly 5 percent is overwhelmingly commercial banks creating deposits through ordinary lending - bank loans are up 7.3 percent year over year - not a central bank purchase program. That distinction is central to Section 3. ^[4]

Federal debt has grown from roughly 107.7 percent of GDP on the eve of COVID to 122.6 percent today, after spiking to 135.6 percent at the depth of the 2020 shutdown when GDP collapsed. In dollar terms the public debt now stands at $39.1 trillion and is compounding at 7.9 percent a year - meaningfully faster than the economy beneath it, which grew 5.9 percent in nominal terms over the same period. ^[3][4]

Here is the mechanical point we believe most commentary gets wrong, and it deserves to be stated carefully. Debt issuance by itself does not create money. What determines the monetary effect is who buys the debt. When the Federal Reserve buys Treasuries, new bank reserves are created and the seller ends up holding a fresh deposit: that is monetization, and M2 expands. When private buyers purchase Treasuries - money market funds, pensions, households, foreign institutions - an existing deposit simply moves from the buyer to the Treasury, which spends it back into the economy. Money is transferred, not created. ^[2][4]

The 2022 to 2024 period is the clearest evidence, visible right in our own data. Federal debt climbed relentlessly through those years while M2 fell $1.5 trillion. If debt mechanically printed money, that combination would be impossible. It happened because the Fed was shrinking its balance sheet while record Treasury issuance was absorbed by private buyers, especially money market funds. The chain investors are often sold is “debt up, money printed, inflation.” The chain we see in the data is narrower: “debt up and the central bank buying it, money up.” That is why the question of what the Federal Reserve does next - Section 7 - matters so much more than the issuance calendar itself. ^[2][4]

Two related items belong on the record, both attributed to their sources because they sit outside our primary data files. First, headlines citing hundreds of billions of dollars of Treasury issuance per week describe gross issuance, most of which is short-term bills being rolled over as they mature; the Treasury’s own borrowing statement put genuinely new borrowing, after maturing debt is replaced, at roughly $189 billion for the entire April to June 2026 quarter. Second, a 2024 paper by Stephen Miran and Nouriel Roubini argued that skewing issuance toward short-term bills and away from long bonds can loosen financial conditions through the same channel as quantitative easing, without any money creation - a practice they named Activist Treasury Issuance. It is a contested thesis, but it is the right frame for understanding why the maturity mix of the debt, not just its size, has become a live policy question. ^[9][10]

Money has to live somewhere, and since 2020 a great deal of it has lived in asset prices. We use two independent valuation measures, both published by GuruFocus as of June 12, 2026, to take the market’s temperature from different angles. ^[5][6]

The first measure compares the value of the entire U.S. stock market to the size of the economy plus the Fed’s balance sheet. At 192.1 percent it sits far above the 137 percent line that marks the most expensive classification GuruFocus uses. The chart below places today’s reading on that published scale, and it sits off the top end of it. ^[5]

Chart 5. Total market capitalization divided by GDP plus Federal Reserve assets, against the valuation bands published by GuruFocus. Source: GuruFocus. ^[5]

The second measure, the Shiller P/E, smooths earnings over ten inflation-adjusted years to strip out cycle noise; at 40.1 for the S&P 500 it reads markedly richer than the conventional P/E of 25.3, which tells you recent earnings are unusually strong relative to their own ten-year average. ^[6]

In our analysis, the dispersion underneath is the more useful diagnostic, and the next chart shows it plainly: each sector’s current Shiller P/E set against the full range it has traded in since 2010. Technology, at 66.6, sits at the 99th percentile of its own history, and Consumer Cyclical at 49.0 sits at the 86th. The picture is more nuanced at the next tier: Communication Services at 44.1 and Real Estate at 43.8 carry high raw readings, but against their own histories they sit nearer the middle of their ranges. At the low end, Financial Services trades at 19.8 and Energy at 28.1. The takeaway is that the market is not uniformly expensive; the stretch is concentrated in a few growth sectors, which matters because index-level outcomes increasingly depend on a narrow set of richly priced names. ^[6]

Chart 6. Each sector’s current Shiller P/E (dot) against its own daily range, January 2010 to June 11, 2026 (bar), with the period median marked. Source: GuruFocus. ^[6]

In our view, none of this is timing information. Valuation measures at these levels have historically said a great deal about the following decade and almost nothing about the following quarter. We present them as a temperature reading, consistent with the fever picture in our regime read above.

Chart 3. Gold/silver price ratio (ounces of silver per ounce of gold), daily LBMA fixing prices, January 2020 through June 11, 2026, with the 20-year mean of 70.5. Source: LBMA via GuruFocus. ^[7]

The gold-to-silver ratio - how many ounces of silver one ounce of gold buys - is the cleanest available gauge of which metal is leading. Across the full record back to 1968 it has averaged about 59, and over the last twenty years about 70.5. Two extremes bracket the COVID era. In the March 2020 panic the ratio spiked to 123, the highest reading in the entire 58-year series, as silver was hit harder than gold in the scramble for cash. Then, at the top of the metals run on January 28, 2026, it collapsed to 46.9 - silver’s richest valuation against gold in more than four decades. ^[7]

Since the January peak the ratio has snapped back to 63.9, just below its long-run averages. The mechanics: silver fell 45.6 percent from its record fixing while gold fell 24.6 percent. In other words, the correction was not uniform across precious metals. It was concentrated in the metal that had become the most expensive relative to its anchor, and the relationship has now mean-reverted to roughly its historical median. ^[7]

Chart 4. Decline from each asset’s own peak through June 12, 2026, LSEG total return data. Navy bars: declines under 10 percent. Red bars: declines beyond 10 percent. ^[1]

Setting the three assets side by side makes the pattern clear to us. From their respective peaks: silver down 42.7 percent, gold down 22.2 percent, and the S&P 500 down 2.8 percent. The higher-beta metal corrected roughly twice as hard as gold; the index barely moved. That ordering, with gold falling least among the metals and the ratio returning to its average rather than spiking, is the pattern that has typically followed the reset of a crowded, popular trade. It is not the pattern that has accompanied a broad loss of confidence in metals as a store of value. Past patterns are not a guarantee of how the current episode resolves. ^[1]

This behavior matches how we classify these holdings within our framework. Silver is classified by conditions and currently behaves as a more volatile risk asset; gold is treated as a structural monetary holding whose short-term price swings are reviewed separately from its long-term monetary role. To us, the first five and a half months of 2026 were a live demonstration of why those classifications are different. ^[1]

The instinct in a year shadowed by war risk in the Middle East, including the widely reported confrontation involving Iran, is to expect safe-haven assets to rise on every escalation. The historical record - including the record inside our own data files - says the relationship is more uncomfortable than that, and we believe our clients deserve our honest read of it.

When global stress becomes acute enough, the first casualty is not any particular asset class. It is liquidity itself. Investors, banks, and funds facing losses and margin calls raise cash by converting whatever can be converted quickly - and gold and silver, precisely because they are easy to trade in size, get swept into that wave along with everything else. March 2020 is the cleanest example on record: in the worst weeks of the COVID decline, gold fell double digits alongside stocks, silver fell far harder, and the gold/silver ratio spiked to its all-time high of 123. Havens were not failing; they were being liquidated to shore up cash positions. The same dynamic, in gentler form, is visible in 2026: from late January through June 12, the dollar index rose from about 96.4 toward 99.7, the 10-year Treasury yield climbed to roughly 4.48 percent, and gold fell from $5,399 to $4,215. Rising dollar, rising yields, falling gold is, in our read, the fingerprint of money getting more expensive - liquidity tightening - not of geopolitical fear being priced in. ^[7][1][4]

For the United States specifically, an escalation involving Iran has three measurable ways of reaching the U.S. economy rather than one: energy prices feeding into a CPI that is already running 4.2 percent; risk premiums in a Treasury market that must refinance a $39 trillion debt stock continuously; and dollar funding demand from abroad, which historically strengthens the dollar first and supports gold only later, once central banks respond. In our analysis, the sequence matters. In past stress episodes the haven bid for metals has arrived in the second act, after the liquidity scramble of the first act has passed. ^[4][1]

The Federal Open Market Committee under Chair Kevin Warsh meets June 17, five days after this commentary’s data date. The policy rate stands near 3.6 percent, down from 4.3 percent a year ago, while inflation has re-accelerated to 4.2 percent headline. That combination - a policy rate barely above headline inflation, with inflation moving the wrong way - frames a genuinely constrained choice. What follows are conditional scenarios describing mechanical relationships, drawn from how these variables have interacted historically. The firm does not publish forecasts, and nothing here predicts what the Committee will do. ^[12][4]

If the Committee holds. Real short-term rates stay thin and the burden shifts to the bond market. Debt service on $39 trillion continues compounding at prevailing yields; the Treasury keeps leaning on short-term bills, where, as reported, the Federal Reserve itself resumed buying after balance-sheet runoff concluded in December 2025. For gold, a hold with 4 percent inflation keeps interest rates low after inflation, a backdrop that has often accompanied stronger gold prices in past periods, though Section 6’s liquidity dynamics can dominate in the short run. For stocks, a hold preserves the status quo that produced record prices at record valuations. ^[11]

If the Committee cuts. With headline inflation at 4.2 percent, cutting takes real rates toward or below zero. In past periods, that combination has often coincided with stronger gold and silver prices and a weaker dollar. That is a historical pattern, not a guarantee. It would also ease the government’s borrowing arithmetic and could support stock prices in the near term, at the cost of accepting the inflation re-acceleration. Markets would read a cut into 4 percent inflation as a signal about which mandate now ranks first. ^[4]

If the Committee raises. Raising rates while the financial plumbing is already strained is the path that puts the most immediate stress on the system’s mechanics. The reverse-repo buffer that absorbed bill issuance has drained to near zero, and the Standing Repo Facility - the Fed’s emergency lending window for the Treasury financing system - saw $26 billion of usage on December 1, among the highest readings since 2020, as reported. September 2019 is the historical reference: reserve scarcity met heavy issuance, overnight funding rates briefly spiked toward 10 percent, and the Fed was compelled into bill purchases within weeks. A hike would strengthen the dollar, pressure metals and equities in the near term, and accelerate the very funding stress that has historically forced policy reversals. ^[11]

In our analysis, the asymmetry across the three paths is the takeaway. Two of them - hold and cut - keep real rates thin or negative while the debt compounds, conditions under which gold has, in past periods, kept its long-term role even through sharp corrections like the current one. Past patterns are not a guarantee of future behavior. The third path tightens into fragile plumbing. As we see it, the single most important variable for gold, markets, and debt alike is therefore not the June 17 decision itself, but whether the funding system can absorb whatever is decided. That is where the next crisis or the next all-clear will show up first. ^[4]

We believe a diagnostic is only honest if it states what would prove it wrong. Our low-grade-fever read above would improve toward Normal if: headline inflation turns back down toward 3 percent and core inflation keeps easing; money-supply growth stays in its current 4 to 6 percent band while inflation-adjusted money recovers; the gold/silver relationship stays near its long-run averages without a renewed spike; funding markets pass quarter-ends and tax dates without further use of the Fed’s emergency lending window; and stock-market gains spread beyond the most expensive sectors. ^{[4][2][8][7][11][6]}

It would worsen toward Warning sign or beyond if: inflation prints above 4.5 percent while the policy rate stays near 3.6 percent; debt growth holds near 8 percent while the economy slows; the Fed’s emergency lending window sees repeated or larger use, echoing September 2019; the dollar and bond yields keep rising together while gold keeps falling, the cash-squeeze pattern of Section 6 intensifying; or the stock market breaks materially while the most expensive sectors lead the decline. None of these is a prediction. Each is a tripwire, and each is observable in the same public data this commentary is built on. ^{[4][3][11][1]}

Five dated items lead our monitoring calendar. The Federal Reserve’s decision on June 17 and the language around its balance sheet. May retail sales the same day, a read on whether households are absorbing 4 percent inflation. The Fed’s preferred inflation gauge and the final first-quarter growth estimate on June 25, against a quarter that grew only 1.6 percent annualized. The June quarter-end itself, the first test of the funding plumbing since the reported December strain. And the Treasury’s next borrowing statement, for how much of the debt is being financed with short-term bills. ^{[4][9][11][12]}

Behind the calendar, our standing watch list is unchanged: weekly money supply against its 5 percent trend; the gold/silver relationship against its 70.5 twenty-year average; the bond market’s ten-year inflation expectation, currently anchored near 2.3 percent despite 4.2 percent actual inflation, a gap that cannot persist indefinitely in one direction or the other; and the dollar index against the 100 line. ^[4][8]

Since January 2020 the United States added roughly $7.4 trillion of money and more than fifteen points of debt relative to the size of its economy. Asset prices absorbed it: stocks to record valuations, metals to record prices followed by a hard, uneven correction concentrated in the more volatile metal. In our view, the mechanics in Section 3 are the spine of the whole story - debt becomes new money only when the central bank buys it - which is why the policy path from here, decided by a new Fed chair facing 4.2 percent inflation and strained funding plumbing, matters more than any single data point in this commentary. ^[2][3][4]

Our diagnosis, stated again and simply: a low-grade fever. Inflation re-accelerating, valuations in their highest band, debt compounding faster than the economy, funding strain already visible - and, against all of that, an economy still growing, banks still lending, and a gold/silver relationship that returned to its long-term average rather than breaking down. The fever chart says monitor closely. It does not say emergency. Conditions can change quickly, and we will update this diagnosis as the data updates.

In the KFSC Risk Managed Strategies, implications from the data remain subject to advisor discretion and updated incoming information.

Version 3.6 · 06/12/2026 · Data as of 06/12/2026 (intraday, LSEG) · Subject to revision.