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Housing Bubble vs. Gold Bubble


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2011 May 18, 12:53pm   7,650 views  51 comments

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Housing:

Gold:

Is history repeating itself?

#housing

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1   wk   2011 May 18, 1:10pm  

Big difference between Housing and Gold -
what percentage of the Gold that has been purchased has been purchases with borrowed money?

Housing Bubble was driven by a Mortgage market/Credit that allowed people with No Money to borrow 100% value of the home. The Gold Bullion is purchased for Cash - I'm not aware of people taking out loans to buy Gold Bullion.
I'm Not aware of any Central Banks that were buying up Real Estate - lots of Central Banks around the World own and have been recent buyers of Gold.

Its possible that Gold may be a Bubble some day - but, thats a way out in the future - too many moves ahead for a mere mortal like myself

2   HousingWatcher   2011 May 18, 1:11pm  

So you can't buy gold with a credit card?

3   wk   2011 May 18, 1:19pm  

In 2004 - 2006 lots of People could buy $200,000-$400,000 Homes with No Money down.
How many people do you know that have a Credit Line of even $20,000 in todays Market - you are attempting to compare Apples and Oranges.

Silvers crazy Performance in the last Month - could be described as a Bubble. Silver is Not the Same as Gold - they are very different.

Gold has Not shown Bubble like behavior - perhaps it will down the road - but, who knows.

4   HousingWatcher   2011 May 18, 1:23pm  

So you don't think gold is a bubble even though it more than tripled in just 10 years? The fact is that hedge funds are dumping their gold in mass. Hedge funds generally are smarter than the average retail investor. They got out of real estate before anyone else did.

And FYI: someone with multiple credit cards could get a $50,000 credit line with little difficulty. I know because I have one.

5   tdeloco   2011 May 18, 6:36pm  

HousingWater, the difference is that we don't use gold as a collateral to credit debt. It can be done, but it wouldn't be common.

When people started defaulting on their loans, the banks ended up with millions of houses worth (for the time being) much less than what they're owed for. Furthermore, REO houses tend to be totally trashed and requires a significant amount of money to fix (some up to $100k in damages). An ounce of gold is still an ounce of gold. No repairs necessary.

6   wk   2011 May 18, 9:18pm  

Here is a good analysis of the Soros selling Gold vs what other Hedge Fund Managers are doing -
"Soros had bought gold to protect against possible deflation, though his fund now believes there is a reduced chance of such a condition, the Wall Street Journal recently said, “citing people close to the matter”.

Should Soros and his fund think that inflation is now a greater risk than deflation then it is curious that they would sell all their ETF holdings. It is also curious as Soros is on record regarding having serious concerns regarding the outlook for the euro and the dollar and the dollar as reserve currency of the world.

There is of course the precedent of other hedge fund managers , such as David Einhorn, who have also sold their gold ETF holdings but bought physical bullion in allocated accounts due to a concern about counter party and systemic risk.

It is quite possible that Soros’ fund has adopted a similar strategy.

This would allow Soros to discreetly accumulate bullion away from the public and media spotlight that result from SEC filings.

Paulson & Co., the $36 billion hedge fund founded by John Paulson kept its largest holding - $4.41 billion in the SPDR Gold Trust. Paulson’s belief in gold is seen in the fact that those who buy his fund can have their stakes denominated in gold rather than in dollars, meaning the value of their investment rises and falls with the price of bullion – lessening exposure to the dollar.

Paulson, unlike Soros, is on record as having purchased gold to protect against inflation. "
http://www.zerohedge.com/article/soros-sells-gold-etf-while-paulson-buys-pimco-favour-gold-%E2%80%9Cprotection-against-what-can-go-wr

7   TechGromit   2011 May 18, 9:35pm  

It also doesn't cost you 5% of your profits to sell gold, no Realtor involved. There is also always a market for gold, you can sell tomorrow, instead of waiting months or even years for a buyer. Weather gold is over priced or not all depends on how stable you feel the dollar is. With the unmanageable debt the Federal government has, I firmly believe that sooner or later the dollar will hyperinflation to almost nothing. It's just a question of when. Gold may very well be in a bubble in the short term, but in the long term it's dirt cheap.

8   Debt-free Renter   2011 May 21, 1:33am  

I think you've got to remember that the real estate bubble was fueled by easy money in the form of trillions of credit dollars, and the coming gold bubble is going to be fueled by easy money in the form of trillions of printed dollars. I don't see much difference.

Also it looks to me like we are in the institutional investor phase of the bubble graph here: http://www.marketoracle.co.uk/Article9372.html where hedge funds and universities like University of Texas begin to buy at $1500/oz, after investors like Jim Rogers and Marc Faber bought in the smart money phase at $300/oz.

I would encourage everyone to hold a few gold coins.

9   clambo   2011 May 22, 3:53am  

This is kind of fun, but I will take a shot.
1. There are central banks and also very conservative, long running, gigantic mutual funds at places like Fidelity that are still buying gold. The gold bugs are not the only people buying gold.
2. Most people buy gold with cash, not credit. Most people bought houses with credit, not cash. If you bought gold with credit, and could not afford it, no problem with gold, since it is liquid and you'd sell it. Houses are not liquid of course.
3. People believe in gold like a currency, a place to park money that is safer than the currency where they live. As the dollar falls and as the debt spending in the USA increases, trust in dollars falls and desire to buy gold increases.
4. There is gold in the ground, but they can't get it out quickly, so the supply increases should not hurt the price.
5. If you own some gold, if things get difficult for you, you can sell a little bit of it and pay rent and buy food. If you are deep underwater with your house, you can be foreclosed and thrown into the street.
I consider gold a way to preserve capital. There are substitutes, for example a bank account in Swiss Francs.
When and if I were truly wealthy, I would consider gold as a way to preserve capital that I was no longer putting to use. I consider gold a cash substitute.
The US dollar has fallen almost 20% since Obama took office, but you won't see that graph on the front page of the NYTimes.
A very interesting graph is the collapse of house prices shown in Gold price, down 80%!
People do all kinds of interesting things with their money. Some traded $100 for a share of Linkedin, for what reason I do not know.

10   HousingWatcher   2011 May 22, 8:51am  

"2. Most people buy gold with cash, not credit."

Why are you assuming that only peopel are buying gold? What about the Wall St. banks that are borrowing money from the Fed at less than 1% interest and using that money to buy gold and other commodities? Gold is most certainly being bought with easy money, courtesy of the Fed discount window.

11   wk   2011 May 22, 10:36am  

You are correct excess money flows every where - and the Feds easy Money has raised the price of Gold.
The question before us is will the Federal Reserve tighten the Money Supply through raising interest rate fast enough or will the US Dollar continue to lose value as the Central Bank continues to increase the Money supply.

My 9 hour Camping candles cost $2.28 in 2000 and now they cost $6.30 - a 300% increase. Camping candles apparently are a better store of value than Real Estate, but not quite as good as gold.
Gold have been considered a store of wealth for thousands and thousands of years. The United States Treasury has a huge cache - if its not a store of value and due to come crashing down why isn't the US Treasury recommending we sell off the Gold? The country could certainly use an injection of money.

12   HousingWatcher   2011 May 23, 6:02am  

So then you admit that, like real estate, gold prices are being fueled by easy money? What will happen to gold prices once the easy money from the Fed stops flowing?

13   wk   2011 May 23, 6:19am  

HousingWatcher-
What will cause the Fed to tighten Money - and stop to flow of easy Money?
Raise interest rates - that will make it very difficult for our Own Government to continue borrowing at the current pace....
How does the Government keep Real Estate going if the Fed Reserve reins in their easy money policies.

Unlike Real Estate - when someone invests in Gold there aren't property taxes to pay every year, there is no up keep, it doesn't depreciate from wear and tear, and its portable.

Price of Gold is set by the market constantly and you can sell without any time.

14   EBGuy   2011 May 23, 7:11am  

It also doesn’t cost you 5% of your profits to sell gold
Correct, it'll cost you 28% (max. tax rate) of your profits as gold is a collectible according to the IRS. Capital gains on a primary residence are taxed at 0% (up to $250k).
It should also be pointed out the the Shiller graph is adjusted for inflation; the gold graph looks to be nominal prices.

15   HousingWatcher   2011 May 23, 7:17am  

And many states have their own capital gains tax you have to pay when you sell the gold on top of the federal tax. In California, it is 9.3%. In NY, it is 12%. So you could be paying 40% in taxes.

16   wk   2011 May 23, 8:37am  

No one here is recommending people invest an amount equal to the value of the Primary Home. Buying your primary home and having some of your Savings in Gold Bullion are not an either or scenario.

Gold is a store of value - comparing the Tax Rates on potential Profits on your Primary Home vs potential Profits on Gold Bullion is a 'fools errand'.

Perhaps you need to speak to anyone that had Money Invested in the Money Market Fund called the Reserve Fund. It took months for people to get their Money out of this safe investment.
I'm not aware of any shadow inventory of Real Estate - look around your community and you are bound to see a number of homes in disrepair because they are in foreclosure. But, feel free find yourself some more Real Estate to buy - I understand they aren't making any more of it and the tax rate on profits is eye popping. I'm not aware of any Shadow inventory of Gold -

There are lots of reason to own Gold Bullion - but, no one can selll you on it.......best of luck.

17   Debt-free Renter   2011 May 23, 7:27pm  

What some people are insuring against by buying gold, is that the Fed is going to be forced to stop the flow of easy money because they will have broken the dollar. By their decades long policy of devaluation they will have brought the dollar down to its intrinsic value of zero--which is where all fiat eventually goes. When the dollar is finally broken gold will be money.

As James Dines says, "When this bubble, this currency bubble, the biggest bubble in history of printing money and everybody thinks it's normal, when this bubble collapses gold is going to be money. And If you don't have any gold, you are going to be screwed."

As Marc Faber says, "I still believe the best currency is gold and silver, and this is not the perception of most people. They believe gold and silver are speculative investments."

Marc Faber further says, ""So they have to invest in something, and so they look for real estate, they look for equities and of course they come to realize slowly, I have to say very slowly, that gold and silver are not commodities in the sense of industrial commodities, but that they are currencies. Precious metals are basically currencies that are honest because you can’t increase the supply indefinitely. You can’t have QE2, QE3, QE4 in the gold market."

To my mind, gold is a backup currency held as insurance against other people's stupidity breaking the dollar. We're lucky we have it. And as Albert Einstein said, "Only two things are infinite, the universe and human stupidity, and I'm not sure about the former." Infinite stupidity leads to infinite money printing. Good luck!

18   wk   2011 May 24, 10:23pm  

Housingwatcher,
You are aware that the IMF believes Gold is a Money - the key phrase is IMF holds Gold for financial soundness
- "The IMF holds a relatively large amount of gold among its assets, not only for reasons of financial soundness, but also to meet unforeseen contingencies. The IMF holds 103.4 million ounces (3,217 metric tons) of gold, worth about $83 billion as of end-August 2009, making it the third-largest official holder of gold in the world."
http://www.imf.org/external/about/gold.htm

19   xenogear3   2011 May 25, 12:09am  

Isn't IMF Chief was captured and will be sentenced because he bought lots gold with dollars?

wk, with the way you pump about gold, you could be next :)

20   wk   2011 May 25, 12:48am  

Xeogear3,
It took me a number of years and lots of mistake to finally understand the value of Gold.
I'm not recommending that anyone go out and buy lots of Gold today or tomorrow. But, if you are interested in preserving the purchasing power of your savings it is important to learn about gold and the develop a plan to start acquiring it.

Best Regards.

21   xenogear3   2011 May 25, 1:11am  

Don't you think that you are a little bit too late to tell us that?

22   wk   2011 May 25, 4:43am  

I don't understand your question.

Do I think Gold has had its big move or my motivations in trying to get people to understand the importance of Gold for savings?

23   wk   2011 May 26, 7:42am  

A great article by John Rubino - he was sharp enough to see the Fannie Mae crisis way back in 2003 0or 04 - and he understands more about Gold and Real Estate crisis than any writer out there.......The Housing double dip QE3 and Gold -
"With housing falling and government stimulus shrinking, all the macro pressure would seem to be on the downside. Which means a weak economy going into a presidential election year, something that is virtually never tolerated by the folks with the printing press. So…yet another data point in favor of QE3 or some other big liquification event — and another reason to load up on gold and silver in the very near future"
http://dollarcollapse.com/housing-bubble/the-housing-double-dip-qe3-and-gold/

24   xenogear3   2011 May 26, 5:54pm  

If you think that dollar will collapse, buying gold is really a "slow" method, because it is already up 5 times since 2000.

The best way is to buy houses with borrowed money. After dollar collapse, you get all these houses for free.

25   wk   2011 May 26, 9:42pm  

Xenogear,
Buying Real Estate is a leveraged play - borrowing Money to control an asset you normally can't afford.
Leverage=Increased Risk (lots of risk)

During the Real Estate Boom the everyone was convinced that Real Estate offered a leveraged investment with no downside - many were wrong.

The major draw back to the using leverage with Real Estate is you need lot of cash flow to pay your Mortgage payments,Real Estate Taxes, and upkeep.

If you read John Rubino's article he thinks there is another leg down for Real Estate. Mr Rubino called the Fannie Mae crisis years before anyone else and has been right numerous times - I'm not willing to bet his against advice are you?

26   B.A.C.A.H.   2011 May 28, 4:05pm  

Gold is money.
Money is not an investment.

27   wk   2011 May 30, 12:51am  

sybrib- exactly......
The IMF calls Gold Money as I mentioned earlier-
why for financial soundness and to meet unforeseen contingencies - it sounds like IMF thinks of GOLD as the IMF Emergency Fund - why doesn't the average American realize Gold is Money and has been for a very long time??
"“The IMF holds a relatively large amount of gold among its assets, not only for reasons of financial soundness, but also to meet unforeseen contingencies. The IMF holds 103.4 million ounces (3,217 metric tons) of gold, worth about $83 billion as of end-August 2009, making it the third-largest official holder of gold in the world.”

28   xenogear3   2011 May 30, 3:41am  

So you use dollar (which is money) to buy gold (which is another money). This is no different from exchange dollar to Japenese Yen or Chinese RMB.

Sure. Gold went up 5 times in the last 10 years. This doesn't mean it will go up another 5 times in the next 10 years.

I still think that buying positive cash-flowed stock or real estate is a better idea.

29   nope   2011 May 30, 10:35am  

wk says

why doesn’t the average American realize Gold is Money and has been for a very long time??

Because I can't go to the store and buy groceries with gold.

The use of the term "money" here is meaningless. Most people use the terms "money" and "currency" interchangeably, and gold isn't used as currency at present, so to most people it isn't money.

As far as investments go, it's idiotic to say that money can't be an investment. Buying Euros in 2000 and selling them in 2010 would have been an amazing investment.

30   wk   2011 May 30, 8:35pm  

Kevin,
Definition of Money:
"mon·ey
3.
gold, silver, or other metal in pieces of convenient form stamped by public authority and issued as a medium of exchange and measure of value. "

Many people opt for American Eagles Coins- stamped by the United States Mint in Silver or Gold because the feel this is a real form of money.
http://www.usmint.gov/mint_programs/american_eagles/index.cfm?action=american_eagle_bullion

31   JDasdf   2011 May 31, 1:19am  

Gold is worth what someone will pay for it.
When folks feel they need it the price goes up according to the level of paranoia.
If they feel they don't need so much of it they won't pay as much.
Don't forget the asked/offered % spread on small coin/bullion.

If...if employment and wages rise the level of paranoia will lessen.

Owning gold is an effective bearish hedge requiring little effort.
Owning real estate is a business requiring work. I personally know more self made millionaires (in cash) than the same with gold. I know ordinary folks, not hedge fund traders.

32   LAO   2011 Jun 6, 8:18am  

You are taxed out the ass on all GOLD precious metals... Most people don't even realize this until they go to sell! They are considered collectibles and taxed at 28% by the FED even long term investments. Then another 10% tax by the state of California...

So if you buy gold.. you basically owe Uncle Sam nearly 40% of your profits... That's not the best investment going forward.

Especially with the stock market nearing 2007 bubble levels again... I feel like we deflated one bubble.. "housing".. and all that hot air went into the GLD... Then the stocks started inflating back to bubble levels...

Now if GLD bursts... maybe housing will re-inflate... who knows... The money... imaginary or not always seems to inflate some other sector as another sector is deflating....

33   FortWayne   2011 Jun 6, 2:05pm  

housing is unlikely to inflate without some insane government money pumping.

There has been some talk about Liar IPO's being legalized, so maybe another internet boom/bubble is next. It's hard to predict those things unless you just one day see average American buy into crazyness on the main street.

34   wk   2011 Jun 6, 11:38pm  

Mr Mortgage - Mark Hanson does a great job highlighting the distress in the Real Estate Market and especially the shadow inventory.
http://mhanson.com/blog

Shadow Inventory + decreased availability of credit = Trouble of Real Estate

Everyone I know who has purchased Gold is fully aware of the Lousy tax treatment of Gains by the IRS. Buyers are buying to have a store of value and not for an investment. People put a portion of their saving in Gold for diversification and preserve the buying power of their savings.

Gold Bullion doesn't go to zero or get locked up like Paper Investments can - Gold Bullion can be liquidated much faster than many Paper Investments.

If you know anyone that had Money in the "Reserve Fund"
http://en.wikipedia.org/wiki/Reserve_Primary_Fund - Investors had no access to their Money for 12 months. This is an extreme case, but it illustrates the flaw in our illusion of safety of Paper Investments.

35   uomo_senza_nome   2011 Jun 7, 3:16am  

For all those who think gold is in a bubble already, I quote Nouriel Roubini who said this in 2009:

“Gold is inversely correlated to global short-term interest rates and there is a race right now towards 0%. Production is down 4.0% y/y while fiat currencies globally are being created at a double digit rate by the world’s central banks….As for all the talk of a ‘gold bubble,’it would take a nearly 625% surge in gold to over US$6,000/oz and a flat stock market to actually get the ratio of the two asset classes back to where it was three decades ago when bullion was in an unsustainable bubble phase.”

Jim Grant from Interest Rate Observer: “Gold is the reciprocal of the world’s confidence in the likes of Ben Bernanke. I think the price will go higher.”

Since the Fed is engaged in distorting the dollar through quantitative easing a.k.a electronic credit creation, Once you start pricing housing in gold, things become more clear: http://dailycapitalist.com/2011/06/01/home-prices-vs-gold-vs-inflation/

Debt has reached unsustainable levels in most of the Western Countries (PIIGS in Europe, US) and how will it get resolved? For this, I quote Ludwig von Mises:

“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”

Fed has chosen to debase the currency system. Pick your bets accordingly.

36   Debt-free Renter   2011 Jun 7, 4:07am  

austrian_man says

Fed has chosen to debase the currency system. Pick your bets accordingly.

Yep, it is literally impossible to pay back this debt. The only way it could be paid back in our lifetimes is to inflate it away by debasing the currency. This is what governments have always done for thousands of years. Here's the strategy outlined:
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/6/4_Jim_Rickards.html

37   X4Gregor   2011 Jun 7, 4:20am  

Interesting discussion about gold as a "store of value" v. money. I think it's more like money, but that opinion may not matter much. As I understand, there is much more so-called value in derivatives for gold than there is actual bullion--perhaps by a factor of 100. So it won't take much of a decline to make investors run for the door--though I can't fathom what would create such a run currently. The psychology of gold ownership borders on religion, and that's a good prop for the price in uncertain times. On the other hand, fear is also a strong motivator.

38   uomo_senza_nome   2011 Jun 7, 4:30am  

X4Gregor says

Interesting discussion about gold as a “store of value” v. money. I think it’s more like money, but that opinion may not matter much. As I understand, there is much more so-called value in derivatives for gold than there is actual bullion–perhaps by a factor of 100. So it won’t take much of a decline to make investors run for the door–though I can’t fathom what would create such a run currently. The psychology of gold ownership borders on religion, and that’s a good prop for the price in uncertain times. On the other hand, fear is also a strong motivator.

Value is an ambiguous term, in the sense that it can mean different things for different people. Gold is a store of purchasing power, purely because of the fact that it cannot be printed at will. The Government cannot debase gold, as a result it retains purchasing power. (you can measure purchasing power in loaves of bread, a nice suit etc.)

If you want to store purchasing power, then paper markets are not the place to be for precious metals. Physical holdings are the best, because the very reason you want to own precious metals is that they carry no "counter-party risk". Derivatives carry counter-party risk because the institution managing the derivatives can default on its obligations.

If one does not understand the importance of gold and the current mad state of our monetary system (which abandoned the gold bond in 1971), then yes - when they see gold's performance - it would feel like as if gold ownership is like a religion.

The madness is actually on the other side, where private institutions can create money out of thin air and fund government spending, ensuring that the citizens are enslaved forever in debt.

39   uomo_senza_nome   2011 Jun 7, 5:04am  

state says

austrian_man says

Gold is a store of purchasing power, purely because of the fact that it cannot be printed at will.

other things that cannot be printed at will:

iron

sulfur

mercury

tungsten
Congrats on letting the guys at goldline.com pour bullshit in your ear until you think that gold has something going for it other than being pretty

what you say is true and you know what the funny part is? History says that Iron has been used as currency.

Sulfur, Mercury, Tungsten also cannot be printed at will. Gold has some other properties as well - it is non-corrosive, does not undergo oxidation when exposed to moist air, easy to handle when alloyed with copper (commonly done for coins), divisible due to its malleability and homogeneous (any piece is like every other piece).

I'm not a chemist to know whether the metals you mention fit all those properties, but I'm sure they don't satisfy ALL those criteria, otherwise they would have been chosen as medium of exchange in history.

lol - goldline seriously? thats the best you got? Instead of refuting my points in a reasonable way, you pick the idiots who advice on gold investing and trash me.

40   uomo_senza_nome   2011 Jun 7, 6:30am  

state says

austrian_man says

Gold has some other properties as well - it is non-corrosive, does not undergo oxidation when exposed to moist air, easy to handle when alloyed with copper (commonly done for coins), divisible due to its malleability and homogeneous (any piece is like every other piece).

all of this is completely irrelevant, how do you not understand this? who cares about malleability?
or do you want to go to a completely coin based system where you literally must carry the gold around with you to trade?
btw, the medium of exchange that history has chosen is THE DOLLAR/EURO/YEN etc. or do the last 60 years not count as history

It is relevant because you brought up sulphur, mercury, tungsten etc. and asked why are we not considering them as money? I just gave you the historic reasons as to why humans believe gold is superior to other metals.

I'm not saying we should go to a coin based system where we have to carry gold to trade. All I'm saying is that money has to be chosen by the free market. Not by decree of the government. Simple reason being the only way people can restrain their own government from spending beyond its means is when people control the money.

How do you think the debt never spiraled out of control during the 30s to 70s? Purely because United States honored the gold bond for the US dollar.

Read this: http://www.constitution.org/mon/greenspan_gold.htm
That was none other than Alan Greenspan, the brain behind the housing bubble. Greenspan has never publicly retracted even a single word of that essay. makes you think doesn't it?

Last 60 years is a blip compared to entire history of human existence. Yep the public has been using fiat currencies as medium of exchange, because they don't have a CHOICE. Free market is a joke when money is not free.

The global financial system is really on the precipice of another recession and the cracks are obvious for those who wish to see beyond the mainstream noise.

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