Property risk highest in a long time

The number one rule for both investing and speculation is the preservation of capital.

Where an asset is income generating, that income flow forms part of the capital preservation.

So for an income producing asset, for example if the yield is 5%, one can say that based just on the yield I will get my money back in 20yrs assuming zero asset value at the end of 20yrs.

Or some blend of this.
If the asset falls by X % then I need y years of income to recover the loss in capital.

One then needs to continuously test the validity of the yield.

But with an asset that is non-income producing, the preservation of capital is dictated solely by market pricing of the asset.

Many of the people who are speculating on the price movement of gold are doing so based on thematic factors. (eg money printing, govt deficits etc etc).

So that theme forms the base of their reason for speculation.

Yet just as the yield needs to be tested for validity.
So does the theme for acquiring a speculative position need to by tested.

And the way to test the theme is to look at market pricing.
If the theme is correct, then it should be reflected in the market pricing.

Gold pricing is not correlating anylonger with the theme. Gold is trending downwards, therefore, for now, the facts have changed.

And in the words of Lord Keyne, when the facts change I change, what do you do sir?


The other point I would like to make with asset pricing:
Asset price increases are dependent on buyers. For an asset price to increase there needs to be an increase in the pool of buying support.

For asset prices to decrease there just needs to be a fall in buying support.
 
The number one rule for both investing and speculation is the preservation of capital.

Where an asset is income generating, that income flow forms part of the capital preservation.

So for an income producing asset, for example if the yield is 5%, one can say that based just on the yield I will get my money back in 20yrs assuming zero asset value at the end of 20yrs.

Or some blend of this.
If the asset falls by X % then I need y years of income to recover the loss in capital.

One then needs to continuously test the validity of the yield.

But with an asset that is non-income producing, the preservation of capital is dictated solely by market pricing of the asset.

Many of the people who are speculating on the price movement of gold are doing so based on thematic factors. (eg money printing, govt deficits etc etc).

So that theme forms the base of their reason for speculation.

Yet just as the yield needs to be tested for validity.
So does the theme for acquiring a speculative position need to by tested.

And the way to test the theme is to look at market pricing.
If the theme is correct, then it should be reflected in the market pricing.

Gold pricing is not correlating anylonger with the theme. Gold is trending downwards, therefore, for now, the facts have changed.

And in the words of Lord Keyne, when the facts change I change, what do you do sir?


The other point I would like to make with asset pricing:
Asset price increases are dependent on buyers. For an asset price to increase there needs to be an increase in the pool of buying support.

For asset prices to decrease there just needs to be a fall in buying support.

Well put.

On a related matter, the financial aggregates are out and housing credit increased by 0.4 per cent over May (been bouncing around that number for a quite some time now). The 12 months to May are up 4.5% which, again, is relatively stable and a poofteenth of the level of credit growth that propelled the levels of asset growth pre-GFC:

9br-cgbys-small.gif


The new normal ticks along......
 
Agreed. The problem I have is when people tell me a rising USD is not mutually exclusive with rising gold price when their 20/20 hindsight losses are put to them, as our fellow forumite does.

There's some truth to that in specific circumstances where fundamental demand in the jewellery industry (which is not forecasted to change much) and industrial use (accounting less than 5% of gold usage) is in serious short-comings. But that has not been the case for a very long time and won't be in the foreseeable future.

As Buffett says, gold price is linked to perceived riskiness of other comparable assets, and its attractiveness diminishes with a recoverying US economy and the easing of QE. As USD fell and USD was printed, central banks around the world for the first time in 20 years were net buyers of gold reserves in 2011. This is turning in 2013.

Obviously it seems most gold investors here don't understand the fundamentals. Again a commodity I look at every day and analyse.

Now as for property, when you have forecasts that a 4 million people city (Melbourne) will grow to 7 million and a 5 million people city (Sydney) will do the same in the next 20 years or so and land within 10 metres of the city centre is scarce, something has to give. Obviously not as good as Buffett's 16 ExxonMobils and many acres of farmland which is a much more complex and productive asset, but it still probably has a bit more fundamentals behind it than gold.
 
the problem hobo-jo, is that you keep going on about property, yet the gold price has suffered accordingly over the last 6 odd months.
Yet what do you say about gold?
Do you cut losses on gold and move to cash???
If not, then how can you be arguing about property..
What specifically have I said about property that you don't agree with?

I was a buyer of Gold up to around AUD$1550 in 2011 (but most bought at much lower prices, sub AUD$1100). In hindsight it would have been great to sell all at the top and buy back my position today, but I'm not interested in trading short term and prepared to ride out corrections while the macro environment supports the liklihood of higher precious metal prices over the medium term (much the same as property investors here).

My posts are not meant to be taken as "long term investors should sell now", but moreso warning that there's a good chance of better buying opportunities ahead.
 
Gold has crashed 40% from peak.

Looks like Steve Keen got the magnitude right... but picked the wrong asset class.

Gold is displaying the characteristics of a classic bubble...

Gold_is_a_Classic_Bubble.png~original
 
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