Gold vs Property

[hobo-jo]

Would I be right to assume that most people still have a PPOR mortgage?
Wouldn't it be wiser to store extra funds there?
I don't know if we'll ever be able to pay off our ppor (I live in hope) but until then, I don't see the point in investing in gold, shares or anything else.

Well it depends on what Gold does from here whether you are better off paying down the mortgage or buying Gold, it's quite clear what the answer would be over the last 8 years (doesn't have 2009 figures though sorry):

A quick comparison of your interest rate paid on PPOR vs appreciation percentage in AUD (- tax if you wanted to get technical) would give your answer. Some gold shares over the same period have had far higher gains than the physical metal, although obviously those results would be much more selective.

 

[MichaelW]

All Fiat currencies eventually die. I don't know when the current Fiats will fall to history, but they will eventually. Current actions by their keepers, the Reserve banks, suggest we're in the final stages of this current Fiat currency experiment. Already some nations are positioning themselves for their demise. China is openly telling its citizens to invest in gold and are doing so themselves. They're caught in a bind due to their over-sized US reserves but are slowly unwinding this in preference for commodities which are tangibles.

When hyperinflation hits the Fiat currencies in their death throws, it will be good to be invested in commodities. A new currency will evolve from the current miasma and it may be backed by a basket of commodities and not just gold, but it will be good to be in gold. Before that happens expect gold to run through $5000 and beyond.

As others have alluded, the global fiat currency market is almost unimaginable. When all those holders of fiat paper simultaneously read the writing on the wall and try and trade their paper for gold which is a very small and crowded market, expect gold to go exponential.

May not be this year or next or even this decade, but it will happen in your lifetime.

I'm still under-weight gold with about $40K in bullion and that much again in junior Aus miners. If I really had guts and backed my convictions 100% then I'd put over half a million in gold. The timing is the tricky bit and the lack of cash flow yield means its an expensive asset to hold. Still, $80K odd at $1000 gold should do well if it runs to $5000 given the leverage of my stocks too. Nice little hedge.

Cheers,
Michael

 

[Sunfish]

You're on the right track Michael but there is no need to limit yourself to Au. Silver is currently at an Au/Ag ratio of near 70. If/when precious metals become recognised as "good" money that ratio will drop to <20 so there is three times the upside.

Resources generally will do well and Pierre Lassonde says "diamonds" are the way to go. Listen to his recent interview on KingWorldNews.

 

[keithj]

All Fiat currencies eventually die. I don't know when the current Fiats will fall to history, but they will eventually.

What are the odds of the A$ failing in the next 20 yrs ?

What indicators are likely to appear before that happens ? Maybe a few 3rd world countries will succumb to hyperinflation ((like Zimbabwe) ? .... maybe the PIIGS, or some of Eastern Europe ? Maybe Oz will see a few yrs of 10%+ inflation ?

There are a few here that advocate holding physical small denomination gold coins. Surely there will be some strong leading indicators well before the A$ fails ? It's currently speculation.

Holding property in that scenario will also benefit as HK alluded to. Holding property (especially houses with veggie garden) looks like a better risk reward proposition for the medium & long term.

 

[MichaelW]

Holding property in that scenario will also benefit as HK alluded to. Holding property (especially houses with veggie garden) looks like a better risk reward proposition for the medium & long term.

Keith,

I agree. Any asset will do well in hyperinflation and I've posted many times in the past that I like property and debt in a high inflation environment. I like gold as a solid hedge given the potential for it to take off in the medium term. But I've still got perspective. I have $4M in property (or will post the development) and $80K in gold. Perspective.

Cheers,
Michael

 

[Ajax]

More information on Perseus Mining (am a bit biased as I hold shares in PRU). Video of recent presentation in Sydney (18 February 2010). I really like their story.

http://www.brr.com.au/asx/PRU/perseus-mining-limited/

 

[WinstonWolfe]

All Fiat currencies eventually die.

Sounds like you hang around at Financial Sense Newshour a bit.

I tend to agree the USA and Europe have no way to pay down debt.
Ignorant slothful electorates with an entitlement mentality will vote out govts that try to deprive them of their 'stuff'..... edit: Obamarama promised more stuff

Some points on my mind.

Yes precious metals will move as USD and US bonds lose favored status as primary defensive position.

But commodities should move as well, in which case, leveraging into blue chips with divs and some gold mining interests, would be reasonable considering timing uncertainty.

And commodities can only move if demand is sustained. I believe the USA and Europe are in for a long period of low interest rates, ergo low gdp growth.....and therefore little growth in their demand for commodities. That then puts the onus on the ability of emerging economies to decouple and sustainably grow domestic consumption. From an animal spirits perspective, China seems to have the most fire in the belly, and discipline. Over the next 10 years, hopefully the misallocation of capital via centralist socialists will decline and their domestic consumption will trend up.

And if commodities are going to move, it is fair to say commodity currencies will retain favored status, as will their mining sectors.

At the end of the day, it is uncertain where future global economic growth will occur most. But if there is to be any growth at all, demand for commodities will be healthy. And Australia, Canada, Brazil should fair well.

Further, it is hard to imagine the whole globe could have sustained zero growth. So in the short to medium term, yes we might be in for a considerably bumpy or flat ride, but in the long run, my latest musings are things are optimistic for Australia in a comparative sense.

Finally, we'd be foolish to miss the opportunity to retain commodity cash flows and up investment in value adds such as pharmaceuticals, robotics, IT, solar energy, and telecommunications. Not doing so ensures we'll have a two speed economy, with ever more social unrest.

And my perspective on property accommodates a two speed economy. For growth with some defensiveness, I think it's reasonable to have exposure to
- commercial in selected regional mining centres
- health sector commercial in Brisbane metro
- top 20% Res A within 7km of Brisbane cbd.

I am also trading gold and examining every which way via TA, hoping to foresee a break out.

 

[House_Keeper]

And commodities can only move if demand is sustained. I believe the USA and Europe are in for a long period of low interest rates, ergo low gdp growth.....and therefore little growth in their demand for commodities. That then puts the onus on the ability of emerging economies to decouple and sustainably grow domestic consumption. From an animal spirits perspective, China seems to have the most fire in the belly, and discipline. Over the next 10 years, hopefully the misallocation of capital via centralist socialists will decline and their domestic consumption will trend up.

And if commodities are going to move, it is fair to say commodity currencies will retain favored status, as will their mining sectors.

At the end of the day, it is uncertain where future global economic growth will occur most. But if there is to be any growth at all, demand for commodities will be healthy. And Australia, Canada, Brazil should fair well.

Good point.

So much of what we read is focused on the US. A lot of people still assume that our fate is tied to the US.

Luckily, we are not in the same lot as the US. Most of our trade is now from Asia. China is becoming our biggest foreign investor.

The USD might devalue, but I don't see why the AUD would, especially if Asia becomes the remain the key driver of economic growth, as it has been in the last few years at least.

So holding Australian property, resources, and gold makes sense in the likely scenario where the USD is going to devaluate significantly.

 

[WinstonWolfe]

So holding Australian property, resources, and gold makes sense in the likely scenario where the USD is going to devaluate significantly.

keeping in mind if the USD weakens further, and the AUD gains, gold in AUD might continue its trend of the last 2 years, for some time.

 

[MichaelW]

Sounds like you hang around at Financial Sense Newshour a bit.

Amongst others...

For those new to this way of thinking, here's the argument distilled down to its raw ingredients in a very consumable package:

http://matterhornassetmanagement.com/2010/02/11/sovereign-alchemy-will-fail/

All the countries of the major trading currencies – the Dollar, Euro, Pound and Yen – have major economic problems that can only be resolved by massive money printing. This is why it is a futile game to try to predict which currency will be the weakest out of the above four. They will all weaken substantially but not at the same time. Therefore, we will have incredible volatility in currency markets in the next few years whilst speculators lose their shirts jumping from one currency to the next. There will be very few winners in that game.

So are there any currencies that are better? Yes, relatively, the Norwegian kroner, the Canadian dollar and possibly the Swiss Franc and Australian dollar will do better. The Renminbi will also do well but is difficult to invest in.

Gold

So whilst many paper currencies become virtually worthless in the next few years, gold will continue to do what it has done for 6,000 years. It will maintain its purchasing power and therefore appreciate substantially against all paper currencies.

Just having assets demoninated in AUD like local real estate will help your future purchasing power globally. There's a reason China is buying Aussie real estate at present.

The AUD/EUR cross rate is now about 1.5 where it was recently at 2.0. I expect that to only improve in the next few years. So that $1M margin you make on your property projects in AUD buys a lot more in EUR and USD than it used to. Time to cash in and buy that Bavaria 44 yacht in Croatia for EUR70,000 and bring it back to Australia. Locally they're AUD$250,000...

I love the lucky country.

Cheers,
Michael

 

[House_Keeper]

An article from the herald that is relevant:
China may be hiding US Treasury bonds

I found that bit interesting:

He said the more than doubling of Treasury bond purchases by Britain and Hong Kong "makes sense" for China as it had to park its huge chest of foreign exchange reserves.

"These cannot be spent at home and are too large to put anywhere other than the United States. No other country has financial markets capable of absorbing them,"

Looks like China needs to redirect money towards domestic consumption...

 

[WinstonWolfe]

An article from the herald that is relevant:
China may be hiding US Treasury bonds

I found that bit interesting:

Looks like China needs to redirect money towards domestic consumption...

Brad Setzer is a bond market specialist who ran a blog until being seconded to some US govt position. He often mentioned China was buying US bonds and notes by stealth, indirectly through England and Europe. His older posts are certainly worth reading still. They give exceptional insight into global capital flows.

 

[MichaelW]

More related coverage today:

The Greek pain spreads

The world’s major currencies continued their 'race to the bottom' overnight, as renewed concerns about Greek debt saw the euro sink against both the yen and the US dollar.

The yen soared to its highest level in a year against the euro, and the US dollar tested its recent highs (in European trade, though at the time of publication it slipped back in late US trade), as investors flocked to perceived safe investments such as US treasuries. The only currency that managed to outpace the euro’s drop was sterling, which fell after figures showed that business investment in the UK slumped in the fourth quarter of 2009.

Cheers,
Michael

 

[Aaron Sice]

i love how a country like Greece, with questionable drinking water, 2000 year old sewerage system and an economy based around serving coffee and salad can affect the most powerful economic nation and a conglomerate of the same.

i smell an overexaggeration somewhere.

 

[Sunfish]

Originally Posted by Business Spectator
The world’s major currencies continued their 'race to the bottom'

The Financial Sense guys call this competitive devaluation. We were expanding our money supply (M3) at about 20% pa before the GFC so we are involved here too.

Generally though, our A$ will remain strong and it looks as if we are about to have a wages break-out (at least in the resource sector) so I am not inclined to buy Oz miners. I haven't gone there yet but mainland USA Au/Ag miners are looking attractive. They are assured of profits as prices rise in their currency and their recession limits wages and costs. I would prefer actual profits in USD and losing a little on the exchange rate then having companies here struggling to contain costs.

I'm concerned about what will happen in Mexico when Cantarell (their big oil field) ceases to produce enough to export and they go the way of Greece. So I'm as much in the dark as anyone.

 

[topcropper]

i love how a country like Greece, with questionable drinking water, 2000 year old sewerage system and an economy based around serving coffee and salad can affect the most powerful economic nation and a conglomerate of the same.

i smell an overexaggeration somewhere.

Dunno BC. I was wondering the same thing.
Just googled up some figures. World fact book.


Greece has roughly half our population,
yet exports just 18.6 billion $US of stuff.
Australia exports 161 billion $US of stuff.

Greece.... imports 61 billion $US of stuff.
Australia imports 161 billion $US of stuff.

Hardly rocket science is it? They are importing more than triple their exports.
People can bang on all they like about housing shortages, immigration, and whatever else as to why Australia is doing well, but I think it's 99% due to the commodities boom. We were able to continue importing all our consumeables and dodads we want, and still be able to pay for it.



Probably not helping is it's agriculture sector,
Greece has an inefficiant ag sector, which is highly subsidised.
Greece has 12.4% of the workforce in agriculture.
Australia has 3.6% of the workforce in agriculture.

Yet Australia's agriculture exports amount to $21 billion US. So 120 thousand aussie farmers export more than the whole Greece economy.


See ya's.

 

[MichaelW]

They're not worried about Greece per se. They're just the canary in the coalmine. Europe can absorb Greeces losses and defaults but its the rest of the PIGS they're worried about. Collectively its a completely different matter so the world is looking at Greece and how well they deal with their issues as an indication of the greater problems facing the Euro. So far they're not dealing with it too well so the Euro is suffering.

Cheers,
Michael

 

[HiEquity]

Yet Australia's agriculture exports amount to 24 billion $US, so 120 thousand aussie farmers export more than the whole Greece economy.

Good research there TC. I can only agree. At some point the massive inefficiencies created by the subsidies in the Eurozone were going to come back to bite them in a big way. You don't have to spend long there to work out things could be done better...

The Australian story of productivity increases off the back of decreasing tariff protection and exposure to international competition was pretty tough for some at the time but has ultimately put us in a very competitive position globally. Here's hoping we can continue that story of improving productivity - it seems to have slowed down a fair bit recently...

 

[WinstonWolfe]

TC,
Can you straigthen me out on the following?

I understand 2/3 of our ag prod. is exported.
Ag makes up around 4% of gdp (4.5b) and 15-20% of exports depending on fluctuating mining exports.

How sensitive do you think ag exports are to stronger AUD?
I am unsure of our main ag export markets - ? Japan, Sth Korea, China, middle east, USA???

 

[topcropper]

TC,
Can you straigthen me out on the following?

I understand 2/3 of our ag prod. is exported.
Ag makes up around 4% of gdp (4.5b) and 15-20% of exports depending on fluctuating mining exports.

I reckon that's about right. Depending on even more fluctuating agricultural production and prices too.


According to the CIA world fact book,
https://www.cia.gov/library/publications/the-world-factbook/geos/as.html

Australia's GDP purchasing power parity was,...
$819 billion US (2009 est.)

GDP - composition by sector:
agriculture: 3.8%
industry: 24.9%
services: 71.3% (2009 est.)


The 24 billion in exports I mentioned above was in aussie dollars it turns out, so that's about 21 billion $US.

So, 3.8% of $819 billion equals 31 billion $US. That'd be roughly total production I'd reckon.
If 21 billion is exported, that's about roughly two thirds I suppose.


The biggest Oz ag production components.
Commodity ......... 2006-07 millions.

Cattle and calves... 6,517
Wheat.................. 6,026
Milk...................... 3,245
Fruit and nuts........ 2,915
Vegetables............ 2,715
Wool.................... 2,138
Barley.................. 1,624
Poultry................. 1,461
Lambs.................. 1,348
Sugar cane........... 1,208

How sensitive do you think ag exports are to stronger AUD?
I am unsure of our main ag export markets - ? Japan, Sth Korea, China, middle east, USA???

Commodities seem to do the opposite of the US dollar, so the actual prices to the producer don't really change. If the US dollar went to hell, I'd imagine commodity prices would go up by the same percentage amount, so I'm not really concerned.



Our major export destinations are,...

Japan 16%
China 10%
European Union 9%
United States 9%
Middle East 8%
Other Asia 12%


See ya's.