Saturday, 31 March 2012

financial relativity

If you've ever sat on a train at a station you may have noticed sometimes that its hard to know if the train beside you is leaving or your train is leaving (well ok, not in Australia where trains never depart so smoothly).

People who look around for investments occasionally point to Gold as a good investment option (some people call them gold nuts). Its easy to see why when you look at the basic data (say on or kitco) as it seems that Gold has gone high lately.

Well an important question to ask yourself here is:
"has gold gone high or has money gone low".

Its a difficult question to answer and I reckon that it can only be done by comparing things relatively. After all, money "floats" these days and its creation is regulated by the government.

If you're a property owner in Australia (and certainly in Queensland) you get occasional notifications of the value of your property from a State Government agency (the name varies from state to state and often from year to year). This seems like a nice service, but in essence its a harbinger of taxation as land value is used as one of the basis of taxation.

I just got my notice the other day and noticed that our value had gone down (again). I pulled out some previous notices and found something interesting over the period from 2001 to now.

First thing which was obvious was that between 2001 and 2004 the value of my land doubled. Thankfully (for my local government taxes) this trend settled down and has now started to reverse.

Got to love all that property speculation back in that period. People got locked into loans over 20 years and the only real beneficiary seems to have been the banks and the real-estate brokers.

Now lets look at my property with respect to the price of Gold.

I've put them in separate scales for ease of comparison, but you can see that property prices peaked at about 2007 (no data for 2008 I'm sorry) and interestingly Gold kept climbing.

To a casual eye this would tend to suggest that Gold was a better investment. There is another interesting view. If we consider gold itself as a currency of exchange (as would have money been if it was not floating and was still pinned to Gold) what would be the house prices in gold: how much gold would you need to buy a my land? This graph is perhaps a little confusing as the Gold columns show how many Oz are needed to buy while the Land Valuation column is just the money. So the amount of gold needed to buy my land has actually gone down between 2001 and 2012.

So in 2001 it was just over 150 Troy Oz to buy my land and in 2011 it returned to just over 150 Troy Oz of gold to buy my land.

So it would seem that if we are trading commodity for commodity that the value of my property has remained stable from start to end of that period and that only the relative exchange in the middle period has changed.

There could be quite some argument as to just why this happened but looking at the curves on those trend lines, the value of property rose faster than that of gold (seen in the price of property vs gold earlier) and that gold has just "caught up" as people realised that one commodity was moving faster in value than another.

You will note that in the 2nd figure I only have data to 2011, while in the 3rd I've inserted a value for 2012 in property value. I don't actually have valuation data for 2012 so I 'extrapolated it' which is of course guess work. I do have data for Gold in 2012 (like spot prices right now) so we can sort of see something.

If property prices do not stabilise (or go down) then we'll see that the price of real estate was over valued (based on the other trading commodity of Gold) in the period from 2001 to now. If it goes down further we will know that land was really over valued in that period.

Fellow blogger Bullion Barron has an analysis of this topic in full house prices over a longer period over here. Where he produces this graph:

Suggesting that whole house land prices were well under this valuation being less than 100 Troy Oz back in the 1980's (when Gold was just recently uncoupled from the US Dollar and that the Australian Dollar was at record highs against the US Dollar).

Makes me wonder how much further it has to fall yet. Perhaps my "estimation" on my land value is too low, and rather than staying static (as I 'estimated') it will continue to fall. In that case even with modest rises in the price of Gold we could see house and land back in the 1980's value with respect to Gold.

So getting back to the original question (is Gold an investment), I don't think it is. You don't easily make money out if it (which is the purpose of an investment) but it sure seems a safer hedge than money in the bank ... or bricks and mortar (well often pine and gyproc these days anyway).

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