Words: Ashley Rigg
Published: 14th September 2011
*Property v Gold v Commission
George Soros, the man who broke the Bank of England, has an interesting theory. It’s one could make both you and your clients money and neatly explains the noughties property boom.
Text book economists believe market prices reflect “fundamentals” at least in the medium term. However, Soros’s theory says that markets can get “reflexive” and can diverge from their “fundamentals” for years and sometimes even decades.
This is because the “fundamentals” used to value a market change as people’s perceptions change. Take the nineties and noughties property boom. Bad loans on housing were almost non-existent during the early days. That allowed the banks to loosen lending standards. Over the years, they moved from lending out three years' salary, right up to multiples of seven, or eight times.
Prices were chased up and all the while the banks' balance sheets got stronger and stronger. People started to borrow more and more money based on looser criteria (self certified mortgages) and this chased up rates even further. The banks were making billions on “risk free” profit on mortgages.
In short, the fundamentals for valuing houses changed because of the bull market itself. Those of us in the property game all made money. Fear of loss (further price rises) meant you could close almost any enquiry on any vaguely respectable looking overseas property regardless of its location or legal status.
That’s history but the interesting insight is the two factors that Soros believes you need for a reflexive market: leverage and trend following.
Gold v Property
Unless you have been on a beach for the last six weeks (some of you have, I get your automated replies) you’ll be aware about the current furore over the gold price. While you were on a sun lounger, the gold price shot up almost 20%.
It’s making lots of headlines in the financial press and people are talking about it but not at anywhere near the fever pitch of the property boom. In depends on the circles you mix in, but what proportion of the people you know have actually bought gold as an investment? I don’t know that many.
In my opinion, we’re at the beginning or perhaps the middle of a trend following phase – certainly not at the end.
In terms of leverage, there is not much of that going on either. Most of the investment is in physical gold or ETF’s that buy the underlying assets. Leveraged investments like spread bets and contracts for difference (CFD’s) are still a small percentage of the market. I’ve also not heard of anyone drawing down mortgage debt to invest in gold.
Could Gold go reflexive?
The answer to this question depends on your faith in western governments. If you believe that US and EU governments can’t repay their without printing a shed load more money then the answer is yes.
My money (literally about 35% of it) is on the gold market going reflexive – the chances of a event like a Greek default are high and the panic is likely to push gold prices higher leading to more speculation and possibly mania in a virtuous (or vicious depending on your view) and self perpetuating circle.
Have your clients missed the boat with the price at circa $1900? When was the last time the gold price fell more than 10% when real interest rates were negative? It’s never happened!
If interest rates (and their precursor, bond yields) start to rise, it’s time to sell or at least decrease your exposure. This will be the time when most retail investors start to pile in and the more unscrupulous “advisor” will step up their sales efforts. Cheeky property in Bulgaria anyone?
Earning Commission from Gold
There are a number of problems with gold. The primary one is that you can’t value it properly because it doesn’t earn any income (Ideal for a reflexive market as experts can more easily talk it up). The bigger one from an industry perspective is that it is hard to earn commission on.
The lowest cost way to invest in gold is either through an
EFT or service such as
Bullion Vault. However for those who like to hold the physical bars or coins (which are free from capital gains tax in the UK) there is a product called Physical Gold which pays agents good commissions for introductions.
You can’t get paid commission on the leveraged money but hey this is 2011. It is not quite a cheap as some of the other methods but it is very safe and tax efficient. You can find
more information here.
If you know of any other similar products please let me know (this is the only commission paying physical gold product I could find).
Source: Global edge
User Comments
I bought my ex a platinum Gold ring that cost me 7000 euros when I sold property in the Costa Del Sol then she left me.
Michael Harrie,
Michael Harrie Lettings
Volatile yes, fickle? Not with fiat currencies in such a state. I agree that property in prime locations are a great investment but the gold bull run has a long way go. Let's talk again when the price is $2500
Ashley Rigg,
Global edge
Gold is a fickle investment - unlike property, it can be shorted (as Soros did with the currency markets). The market has been led by panic and will suffer for the exact same reason as very large players (Like Soros and Buffet) wade into the market and force a dive.
See http://www.ipinglobal.com/ipin-live/blog/331743/property-versus-gold
Peter Mindenhall,
IPIN - International Property Investment Network