Bye Gold or Buy Gold?

Buy gold, not a house: is it a real tip or may be just a provocation?

Barry Ritholtz, author of Bailout Nation and chief executive officer of the New York investment-research firm FusionIQ, recommends going small on gold: 5-10 % of your savings.

“Gold doesn’t have value, other than what someone else can pay out, so by definition it is somewhat speculative,” says Ritholtz, who sold most of his gold position when the metal hit $1,350 an ounce in October 2010. Gold is volatile: He said it could have another run-up to $2,000 or fall to $500.Gold and home prices have parted ways. U.S. home prices were driven by easy lending and a healthy economy, and those drivers are gone. Gold’s price is driven by, among other things, fear of inflation and uncertainty about whether paper currencies will devalue.

For better understanding of the situation, let’s make a brief review into the past. In the previous decade, Americans came to view housing as “safe” relative to stocks and bonds – particularly after the 2001 terrorist attacks and resulting decline in the markets, says Erin Arvedlund, a financial journalist, author of “Too Good to be True: The Rise and Fall of Bernie Madoff”

Pre-bubble, housing prices rose about 3.5 percent to 4 percent annually, since the 1970s. But then the housing bubble kicked in between 2001 and mid-2006, and home prices rose at an unprecedented 13 percent a year.

And then happened that we all know as the world financial and economic crisis. Amid the subprime-mortgage blowup, home prices corrected painfully between 2007 and 2010.

It’s still an affordable time to borrow, adds the author. Mortgage rates are at historical lows, if you can find a lender who’ll bank you. But, “when you buy a house today, you’re buying an asset that’s been falling,” says. “The timeline for buying a house makes more sense if you can wait a few years.”

On a $300,000 house, say, the cost of maintenance, property taxes, and insurance add up to roughly $20,000 a year – and that’s not even including the monthly mortgage payment. If that amount exceeds renting for the year, then keep renting.

Assuming you can buy a home with a fixed 4.75 %, 30-year mortgage, your return on your home could generate 1-4 % a year, and you’re making a small down payment, according to Pershing Square Capital Management L.P., a hedge fund that is making serious bets on single-family homes. Gold, meanwhile, has posted double-digit returns. In 2010 alone, the metal climbed 30 %.

According to Peter Mindenhall, researcher for IPIN Global, house prices will fall slower – they trade at a slower rate (it takes weeks to sell a house, and seconds to trade a gold position). If the entire UK, says Mindenhall, put their houses on the market at once (or even just 30% which is a virtual impossibility anyway) do you think house prices would fall to say 50K for your average house? Of course not! Why? Because sellers would not allow them to be sold at that price and withdraw them from the market.

For all intents and purposes, a house is a physical asset for most people. Whether it is their primary residence or a Buy to Let – like it or not it is a physical asset for the average property owner.

It’s obvious that gold has risen by 353% over the past 10 years, where as UK property prices have only risen 116%:

But it has been done before. Take a look at this remarkably familiar chart line for gold in 1979:

Take a look what happened next year:

As 1981 rumbled in, a different picture started to form with the chart suggesting that gold might be destined for the scrap heap losing about a third in value.

1982 showed some slightly more promising results: but still not reaching the highs of 1979.

Only to be stomped on with a continual downward trend in 1983.

To sum it all up, gold does offer opportunity, no question about that. But when you see significant gains because of a sheeple market place, filled with relatively inexperienced investors that have bought gold just because everyone else is – what do you think those inexperienced investors are going to do? Panic – and panic hard.

Think about it for an instant, although short contracts have a time limit on them to be fulfilled, even with gold rising and just regularly topping up the holding with cash as each fill order becomes due, when the market dives you are sat on a gold transaction at the top of the market that is paid for, and all you need to do is wait for the bottom. All around you are crying into their prepaid envelope addressed to a gold hoarding company – leaving you laughing all the way to the bank.

Don’t get me wrong, says  Mindenhall, – gold shorting (or any kind of shorting for that matter) is not for the faint-hearted, nor the shallow-pocketed. People that short gold or stocks can be likened to those that beat unicorns with sacks full of broken rainbows, often seen as the destroyers of markets. The point is that individuals and companies out there with significant wealth will be doing exactly that and what do you think they will do with the profit? You guessed it, back to the old investment workhorse that is property.

Another financial journalist, Felix Salmon, qualifies Arvedlund’s article as a “bad housing advice of the day”.

“Being “financially smart” is not the same as investing in whichever asset gives you the highest return over some given time horizon. If that were the case, then everybody should just go out and start selling lottery tickets without any downside protection. The fact is that nothing is a good or a bad investment in and of itself: you always have to look at it in the context of the specific risk profile of the investor in question. And if the investor is someone scraping together a down-payment on a house, then it’s trivially true that using some or all of the down-payment money to buy gold at $1,350 per ounce is downright bonkers”.

Think twice before making a decision what to buy. Don’t let the so-called “advisers” cheat you.


One Response

  1. Thanks for the citation!

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