Once upon a time the financial world was a peaceful place, occupied by bespectacled accountants, bean counters and number crunchers. If you wanted to know how much your house might be worth, you asked an estate agent, and then you went and asked someone in the same street who had their house up for sale (or had recently sold it).
If you happened to be an astute investor with some wealth behind you and happened to own some gold, most likely your stock broker might send you a fax with an update, or post you a statement with what your holdings were worth. If you were really "with it" you might even have a financial TV channel that could badger you all day if it took your fancy.
These days though things are slightly different. Internet for the masses has trundled into our lives, even as far down to our mobile phones to ensure that we can see to the second what is going on - if we want to or not.
As a result, everyone, their mother and their dog is now a financial expert it would seem. The press has taken it upon themselves to "report" all this information to us in a way they feel is helpful and less confusing - relying upon things like the internet to tell us things we are capable of reading for ourselves, but mangling it slightly to justify their existence and sell "newspapers".
Quite what the press intend to achieve with all of this is somewhat mystifying (perhaps it's just me) but over the past few months the headlines in the west have been full of house market doom and buy gold "it's a safe haven". Well is it now?
Some simple statistics here, no rocket science.
Now I make no claims to be mathematician of the year, nor the next Stephen Hawking, but just the chart alone points out a single scary fact. Gold has risen by 353% over the past 10 years, where as UK property prices have only risen 116%.
- The optimists out there will be the first to shout out "gold is a hedge against inflation".
- The pessimists will be shouting that "house prices have to fall".
- The sheeple will be throwing money at gold because the consensus suggests it is the better of the two evils.
I don't doubt for an instant that there still might be some more downward movement in house prices but, when I look at gold, I have to ask myself the question, "which is likely to fall further, quicker?"
Arguably, gold has a brake on it because it has extraction/production costs, (this brake is a known entity from when Gordon Brown had a gold sale in the UK) but then so do house prices (although an unknown figure, still a brake as such because we all need to live somewhere).
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 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.
Gold, however, is a very different kettle of fish. You can trade it in seconds (provided you haven't taken physical delivery and hidden it under the bed, even if you have you can still shift it at the local pawn brokers). If bad news hits the markets about gold, the price will dive far quicker than you can get to your web-enabled phone and lower than a trapped Chilean miner with no way of gaining a quick recovery.
The other point to consider with gold values which doesn't affect the housing market is the trading mechanism itself. 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.
Gold on the other hand is open to a lot more trading (hence it being a commodity). The fundamental difference here is that although both gold and houses will fluctuate in price, whether you happen to be using them or not, the gold market has some enemies brought about by the virtue of the mechanisms available to trade it with.
Those of you in the commodity industry will know exactly where I am going with this - the short sale.
A short sale (for those of you not familiar) is when you enter a contract to sell something at a given price, and buy it back later at a lower price - the difference being (hopefully) your profit (if the price has come down from your initial contract agreement)
In the UK, you cannot really short sell a house (although the term exists in the US to delay or avoid foreclosures) there is no market (if you wanted to do such a thing you would be restricted to property related stocks, and even then very limited due to a ban on naked stock shorting).
This mechanism in its own right opens up a huge hole in the "rush to gold" mentality. Why? History clearly tells us that. I have written before about how large noisy investors can move a market, and believe me, those same people are waiting in the sidelines for the time to strike. Whilst there is undoubtedly still a little upward movement left in the gold market, it will reach a point where the investment heavyweights out there see a sign of recovery in the general markets - property included, and guess what? They are going to be there in the background with their short sales ready to go. This won't be a few hundred ounces here and there, this will be incredibly wealthy individuals and institutions that don’t even own any gold at all, all putting in orders to short the market and take advantage.
It has been done before. Take a look at this remarkably familiar chart line for gold in 1979:
Investors who had bought in must have thought "woo-hoo" at the end of the year believing they were on to the next big thing. Problem was though that 1980 came along. Take a look what happened then:
Gold did spike a little further of course to return very sharply to the previous year's figures and gain slowly over the rest of the year to show a total gain of about 10%.
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.
The gold optimists out there will no doubt be saying "what does some bloke in property know?" The point, though, is look at the past. 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 - 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.
- Thursday 04 November 2010