Gold vs Property

[Graemsay]

A couple of posters (above) mentioned how shifting demographics are going to have an impact on pensions. One of the senior opposition MPs in the UK wrote a book called The Pinch about this, and it discusses how the Baby Boomers have ended up with the majority of the wealth in the country, whilst leaving their children to pick up the bills.

There's an article on it here.

http://www.telegraph.co.uk/culture/books/bookreviews/7214352/The-Pinch-How-Baby-Boomers-Took-Their-Childrens-Future-and-Why-They-Should-Give-it-Back-by-David-Willetts-review.html

A poster on the UK Motley Fool site commented that baby boomers had largely been the beneficiaries of buying assets (such as housing) during a period of high inflation, which kept the purchase price low, and then repaying them during a period of low inflation, which kept that side low.

Taking Piston Broke's comments onboard, if we get high inflation then people who're highly geared on property (investors, FHBs) will have the inverse of the boomers' scenario. Namely they will have purchased an asset that is priced for repayments in a low interest environment (and hence paid a high price), and then face expensive repayments. That won't be pretty.

The other thing has struck me is that with low inflation the expectation should be that asset prices will rise slowly.

Taking a detour off topic, I'm starting to think that a lot of the speculative trading by hedge funds is actually damaging the rest of the economy. Traders are trying to generate high returns (to earn their bonuses), and ramping up, or buying into, bubbles. That's possibly what's happening with gold, and also with the anti-Euro punts.

Hobo-Jo - I hope that my comment is from a more accurate source than the first one.

 

[topcropper]

A poster on the UK Motley Fool site commented that baby boomers had largely been the beneficiaries of buying assets (such as housing) during a period of high inflation, which kept the purchase price low, and then repaying them during a period of low inflation, which kept that side low.

Taking Piston Broke's comments onboard, if we get high inflation then people who're highly geared on property (investors, FHBs) will have the inverse of the boomers' scenario. Namely they will have purchased an asset that is priced for repayments in a low interest environment (and hence paid a high price), and then face expensive repayments. That won't be pretty.

I'm thinking similar. There was nothing easy about the high inflation 70's and 80's, and is the reason why the 90's started with such cheap asset prices and took so long for people to forget that period. Anyone highly geared was in big trouble then for a long time. My family owed half a million in the mid eighties, at 22% interest rates at the peak and nearly lost everything.

High inflation is almost looking inevitable. Once all the stimulous is gone [or countries have run out of money] it will start.

I'm certainly keeping gearing low, as it's not like there is any bargains out there in any asset class. Why take the risk for not much reward?


Nice post Graemsay. I agree.


See ya's.

 

[Sunfish]

I am yet to be convinced that inflation is anyone's friend 'cept the guvmint's. They issue the new money and get 100 cents in the dollar return when they spend it but as it sloshes around it slowly devalues. Eventually a saver/investor/retiree is ripped off.

And how would you youngsters like to be funding your retirement today? The share market is a minefield and those who went with Storm are condemned as greedy. They did so because the few % available at the banks was not enough to live on but the young and greedy could borrow cheap and think that low interest rates forever is their right and stuff the retirees. It is the young competing between themselves with easy money that pushed the price of houses out of reach, not me.

You guys say that inflation eats away debt and I think you are wrong BECAUSE, for all but a brief period in the '70s interest paid has always been a few % above the inflation rate so you repay the lender, in cash every year, all his losses via inflation. So if the lender doesn't lose, how can you win?

In a Zimbabwe type hyper-inflation debts would rapidly cease to exist but I am sure no-one expects or hopes for that here. After all, gold bugs are always accused of hoping for disaster and are despised for it. To hope for hyper-inflation is despicable in the extreme.

Part of this post is a response to those who think it is "open season" on us oldies. If that is not your attitude I am not confronting YOU! But if you believe inflation erodes debt I am happy to discuss that further.

 

[JamesGG]

Part of this post is a response to those who think it is "open season" on us oldies. If that is not your attitude I am not confronting YOU! But if you believe inflation erodes debt I am happy to discuss that further.

I'm not one of those 'open season' hunters, SF, and from the last seven years or so (I'm sure that you were here before I was, yes?) I know that you understand the theories better than most.

I'm curious about your thoughts, though. If I may;

If a property is neutrally or postively geared after tax, the cost of debt is covered. The lender receives his losses from the investor, who in turn recoups them from the tenant and the tax office.

Then if the property simply grows to match inflation, the leveraged assets increase by more than non-leveraged assets would. And as the interest on that debt is covered by the cashflow, inflation on the property works in the investor's favour.

That theory falls short, of course, when the property is negatively geared and the investor has to pay the lender out of their own pocket. Is that the type of thing that you were talking about in your post above, SF?

So, I would agree that leveraging non-yielding assets such as raw land, commodities, and Sydney housing (kidding!), would mean that the usual benefits of inflation on debt would be eroded by the ongoing interest payments on that debt.

Then in following that reasoning and ignoring the socio-economic impacts (!), yes, I could see how hyperinflation could be highly advantageous for a leveraged property investor. That's not to say that I would wish those circumstances upon anyone, though.

Your thoughts, mate?

 

[Sunfish]

JamesGG:If a property is neutrally or postively geared after tax, the cost of debt is covered.

Covering the cost of the debt is not "making money on OPM".

I deliberately didn't mention tax because it is a personal thing and hard to discuss on a public forum, but I'm a simple tradesman who has never had a tax "problem". The only thing that worried me was that I didn't pay enough.

The recent poll on this topic showed less than 10% here were earning less than $1,000/week. Now if property is tax effective for you then go for it, but don't laud it as everyone's solution to a problem they may not have.

As for "CF neutral, (before or after tax)" it is only achievable if you have more than 20% skin in the game (Talking Syd here, as MichaelW says it's a good thing) but more like 30% therefore you are not making money on OPM! Your own cashin, or accumulated equity which allows a rent increase, is subsidising your loan. The loan is bleeding your equity. Drawing down on an LOC for a deposit equals a 100% loan so you will be paying 7% interest. 3% net rent means that the property must appreciate 4% pa to break even. Many Sydney properties have not increased by 30% (break even) since '03.

In '03 I bought some shares for $12,800 without margin. That is not much more than the "out of pocket" when buying a house but that parcel of shares is worth $180,000 today. I don't believe that was "once in a lifetime luck". I have picked two others which could have been similar held I held on tight. Taking on the responsibilities of ownership of property for a few pennies in the dollar does not appeal to me. I do own three houses but I am a reluctant landlord.

If you don't like shares and can make prop work, I am not here to convince you to change anything but be careful before advising others you don't know to borrow large sums of money for a few pennies in the dollar return. Keen may yet prove to be right.

Edit: I side tracked myself a little here. Sorry.

 

[Sunfish]

I've worked out how to explain the concept that says that loans don't "inflate away".

These are concept figures, I'm not talking pennies in the dollar.

Today, if you borrow 100% of the ticket price of a property you would repay, interest only, 7% pa. 3% would be to recompense the lender for the current inflation and 4% for the use of his money.

Now consider a 0% inflation scenario (as unlikely as that is). You would only be paying 4% for the use of the money 0% for the interest factor. This could well be cf neutral from day one so it would be easy to own, but after 10 years you could still not sell the property for much of a profit because there has been 0% inflation (there has been wear and tear). But if you had paid the full 7% of the loan each year, thus reducing the principal, it would not have cost you more in cash but you could sell for a cash profit after 10 years.

My contention is that paying the inflation component as you go is very similar to paying off principal as you go. No one has ever said the "P" part of P&I is "free". Nor is inflation.

 

[jaycee]

Good point topcropper.

Australia, with its superannuation system, seems better prepared to handle an older population. We have more migrants that keep the population growing & younger as well.

No European countries have a simiare system which may have existed longer than compulsory super has been in exiteance in Australia ?

 

[House_Keeper]

No European countries have a simiare system which may have existed longer than compulsory super has been in exiteance in Australia ?

Not that I am aware of.

 

[Graemsay]

The UK has a system of voluntary private pensions, and up until 1997 or so, the country was considered to be in a good position when it came to funding retirement.

A combination of the government changing the tax rules (so it took 40% of an individual's pension fund upon retirement ) and the stockmarket crash in 2000 - 2001 wrecked the system.

The other change is that final salary pension schemes (whereby an employee would get 1 - 2% of their wage at retirement per year served with a company) have been closed to new entrants. Except, that is, for government employees. This forces most people into a private pension scheme, which I'm guessing is broadly comparable with the superannuation.

So whilst Oz might be looking good now, things might not be great in the future.

I've been thinking about pensions recently, and if annuity rates remain low (currently 5 to 6% in the UK for a non-inflation linked policy) then I need to save around a million dollars (at 2010 prices) to provide a reasonable income, and ideally would like twice that.

Assuming my investments don't do much better than track inflation, then I've got to put aside a significant proportion of my earnings over the next 30 years (or however long I keep on working) to cover that.

 

[Ajax]

Gold climbs in NY as an alternative to currencies

http://www.businessweek.com/news/20...london-as-stronger-dollar-reduces-demand.html

Currently Bid/Ask 1133.80 - 1134.80 up 15.80

www.kitco.com

 

[Ajax]

Concern over LBMA sales of 'paper' gold?

http://www.gata.org/node/8388

Could send the price of gold sky high.

 

[Sunfish]

Of the top five gold stocks o/night (according to Kitco) I have three of them.

Company
Symbol
Time(EST) Price Change $ Change %
Exeter Resource Corporation XRC.TO 15:59 8.95 CAD +0.53 +6.29%
Lihir Gold Ltd. NASDAQGS:LIHR 16:10 10.58 CAD +0.50 +4.96%
Coeur D Alene Mines Corp NYSE:CDE 16:20 15.40 USD +0.68 +4.62%
European Goldfields Ltd EGU.TO 16:10 6.18 CAD +0.23 +3.87%
Red Back Mining Inc RBI.TO 16:10 21.96 CAD +0.77 +3.63%

 

[Ajax]

Well done Sunfish,

I hold 1 stock only-Perseus Mining. The chart for the last week looks great and could open strongly today.

There are 2 gold stocks- Perseus Mining (PRU) in Ghana/Cote d'Ivoire and now Guinea and Mineral Deposits Limited (MDL) in Senegal which are medium sized Australian gold companies that are likely to be included in the S&P/ASX200 when additions and removals to the index are announced on Friday 5 March.

Where a company is included in the index it often results in a larger demand for the stock as the mandates of various super funds/investment funds often restrict them to purchasing only those stocks in the S&P/ASX 200. Even more so those funds that track/replicate the S&P/ASX 200 which must now buy the stock as it forms part of the index.

 

[majest3]

I am new to this forum, but have found the thread interesting. I am a Real estate and gold investor, but would have to say l am swaying to the gold side. So if you are a real estate investors, that happen to have large amounts Gold tucked away under the floor boards, l am here to help you part with it. I have a property located at Burleigh Waters on the Gold Coast, it is currently rented at $370 per week but is due for a rent rise. The average rent in Burleigh waters is around $420 per week. The property is located a 10 minutes walk to the beach or 2 mins by car. It is 3 bed with double lockup. Block size 612sqm.

It is what l would consider a knock down at a future date. I am looking at $450,000 and would be happy to accept bullion as part payment, Gold , Silver ,Platinum or Palladium upto $170,000. I was considering listing it with an agent, but as l was looking at using some of the proceeds to purchase bullion, l thought l would offer it here first. If anyone is interested please feel free to contact me for more details.

 

[WinstonWolfe]

It is what l would consider a knock down at a future date. I am looking at $450,000 and would be happy to accept bullion as part payment, Gold , Silver ,Platinum or Palladium upto $170,000. I was considering listing it with an agent, but as l was looking at using some of the proceeds to purchase bullion, l thought l would offer it here first. If anyone is interested please feel free to contact me for more details.

have you got your own XRF assay gear?

 

[majest3]

If they are in one ounce coins , nuggets or kilo bars ,it should be relatively easy to confirm they are in fact gold. But in case they are gold plated tungstan, there is a local refiner that does assay test for a fee.

 

[brendio]

You can borrow against gold!

A major characteristic of property is that it has much more collateral value than gold. Even now many banks will give a no doc loan for 60% of equity hardly any questions asked. Try that with gold.

Just out of interest I checked on my margin loan, and BT will lend at 60% LVR against GOLD ETF, an exchange traded fund backed by physical gold. (I am currently no/low doc as I've been self-employed for less than 2 years.)

 

[Sunfish]

Quote:
A major characteristic of property is that it has much more collateral value than gold. Even now many banks will give a no doc loan for 60% of equity hardly any questions asked. Try that with gold.

I've given up correcting this sort of rubbish long ago.

 

[WinstonWolfe]

Just out of interest I checked on my margin loan, and BT will lend at 60% LVR against GOLD ETF, an exchange traded fund backed by physical gold. (I am currently no/low doc as I've been self-employed for less than 2 years.)

True, but it's rare to get a margin call on a house.

 

[Ajax]

Macquarie Prime will lend 75% against stock code: GOLD which is the Gold Exchange Traded Fund.

I prefer gold explorers/miners.

I currently hold Perseus Mining (PRU)-a West African gold explorer which has just been included in the ASX 200 effective 22 March 2010.

Macquarie Prime will lend 45% against PRU.

Against larger gold miners Macquarie will lend as follows:-

Newcrest Mining (NCM) 82.5%

Lihir (LGL) 82.5%

Against Australia's largest bluechip (BHP) they will lend 90%

Unlike Commsec there are no restictions/reduced lvr's where, for instance, you have a portfolio comprising one stock only or your portfolio is limited to several stocks.

With respect to margin calls, the answer is to sell just enough to cover the call...and preferably before the margin lender does it for you.

Ideally you should keep a few % below the margin lender's max. lvr rate (a buffer of $x) to avoid being flicked into margin call on a volatile stock.If you are bullish on gold you should be willing to accept small losses of capital meeting margin calls in the overall scheme of things.

The harder thing to take is changes to lvr's decided upon by the margin lender (sometimes at the oddest of times when the stock is doing really well-I think it has to do with number of clients holding one stock...bit like a mortgage lender with large exposure to one regional centre reducing lvr's on loans secured by property in that location). This happened to me on Perseus last year. When Macquarie reduced its lvr on PRU from 55% to 45% I sold the lot ahead of the change (they gave about a weeks notice by phone). The day of the lvr change and the following days the gold price surged as did the price of PRU from $1.20 to about $1.55.