The run to gold is not brisk nor is it calculated, not yet at least. Unlike real estate, PM (precious metal) doesn’t have the luxury of artificial support funded by taxpayers; this is a good thing as you are soon to see. Some of you are growing discouraged with silver and gold because you perceive them as declining, this is far from the case. You want metals to rise, in dollars, each day or week no less. Since silver and gold stagger sideways more than forward, at least of late, some are beginning to question the two metals. My goal each week is to restore faith for some and make PM noticeable for others.
Gold’s (I often say gold to save space but silver is usually included by assumption) organic growth is nothing like real estate past or present. Today’s RE (real estate) market has me very concerned for those banking on housing values to return in order to fulfill lifelong dreams and plans. The Reuters article below explains my concern better than I.
REUTERS: Falling Home Prices Drag New Buyers Under Water
Reuters- April 26, 2012: More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame.
It is a sobering indication the U.S. housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk.
Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America.
“I’m at least $80,000 under water,” Opalka told Reuters. “We never expected to go under water. We never expected prices to fall like they have. We definitely didn’t see this coming. If I’d known this, we probably would have rented.”
“The overwhelming majority of the U.S. is still seeing home prices decline,” said CoreLogic senior economist Sam Khater. “Many borrowers continue to be quickly wiped out.”
“This is creating a new wave of underwater borrowers,” said Gary Shilling, a veteran financial analyst and well-known housing market bear. “We have all three branches of government trying to keep people in four bedroom houses who can’t afford chicken coops.” Read more.
PROSPECTOR: We are truly living history by fulfilling the Chinese proverb “may you live in interesting times“. But this prophetic wish is turning into a nightmare for those rushing blindly back to RE.
I have said it many times that I’m a huge proponent of housing far over silver and gold. I also perceive RE as a great asset over the long term, but. The problem is most can’t differentiate short term from long term because values are often compared to recent high water lines.
Tim Reid’s article above explains why a home once worth $400k but now selling for $275k is not necessarily a bargain. I won’t attempt to define a housing bottom and do believe market values vary greatly from region to region. What I do know is artificially supporting values with FHA low down financing is doing no one any favors, except for gold holders.
Regardless if your wealth is in gold or housing you must recognize how FHA, Freddie, Fannie, etc play into today’s scenario. All governmental efforts to backstop housing are stimulus and do add to the national debt (the debt your children and theirs will face for a lifetime).
Two questions must be answered before you invest another dime in housing.
- Are low-interest rates reason enough to buy?
- Can you handle paying on an asset worth less than encumbered?
The worst is not the fact housing is dropping in dollars. The worst is housing has tumbled in gold’s measure of value. This is why a home once worth 700 ounces of gold is now worth 100 ounces (85% loss by gold’s standard).
The paragraph above is why I have little concern if my pile of coins increases in dollar terms. If your PM faith is based on gold growing in dollars then I strongly encourage you to reconsider. Think of gold as a yardstick able to measure all other asset values. Yardsticks do not grow in length.
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COMMENTS & QUESTIONS:
Hi, I have an account at bullionvault.com. Just wanted to add something. When you say in your 25th April post “Fees to resale are non-existent too”.
I have had a very positive experience with bullionvault.com but there is a commission that charges 0.082% on every transaction whether it is to buy or to sell, gold or silver.
After trading at least 30000$ the commissions drops to 0.02%
I will look forward to read your e-book.
PROSPECTOR REPLY: Oh boy, thanks for pointing out my mistake. Also, thanks for mentioning Why Silver & Gold Will Go Higher (still looking for those interested in receiving a free copy and willing to post a comment/review). Thanks for clarifying BullionVault commission structure.
QUESTION: Thank you very much for answering my earlier query about exit strategies for precious metals. I hope all your readers are treading the path towards financial safety that you advocate. My question today pertains to the ultimate purchasing power of precious metals in the long term.
I have no doubt that the price of gold and silver will rise remarkably in nominal price terms in an inflationary scenario. However I am concerned that world governments would also raise taxes on capital gains. Mathematically speaking, in an inflationary scenario, since percentage tax rates only see nominal gains made when you sell, even if precious metals prices ascended to magnificent highs in fiat currency amounts would you also not lose a tremendous amount of your gains to the governments?
For example, if the US dollar were to lose half of its existing value and gold were to double in price then we could say that gold has preserved its purchasing power and fulfilled it’s role. However once we take taxes into account, we now have to pay a significant amount on the gain that we have made when we sell thus making us poorer in real terms. Therefore it can be argued that the higher the price of gold in a hyperinflationary environment, the worse we are taxed and the lower our purchasing power.
I have no doubt that this system is deliberately set up so as to increase tax revenues for governments while they devalue their currencies. I was wondering what your solution to this would be. Undoubtedly, those who don’t buy precious metals and keep their money in fiat currency would be far worse off mathematically speaking as their savings would be wiped out by hyperinflation. But having made a great investment decision to buy gold and silver and still come out poorer in real terms would be very disheartening I would think.
One strategy that might work alongside a precious metals investing strategy might be to use the current low interests on home loans to have long-term fixed rate mortgages on property. This way, in a hyperinflationary environment, we would be paying off our mortgages with worthless dollars for years to come and our mortgage burden would be declining over time in real terms while we acquire real assets. Furthermore, we could use the tax breaks associated with property to counteract the tax burden upon selling precious metals.
This is the only option I can see working in tandem with buying gold and silver. Unfortunately I am not based in the US and are therefore unable to take advantage of your fantastic low-interest mortgages! In most other parts of the world there are no such things as long-term fixed rate mortgages. There are only variable interest rate mortgages which can be very dangerous as your interest payments are at the mercy of banks. In Australia which is where I am based, some banks have defied the central bank and raised interest rates even as the central bank lowers them which further illustrates my point!
Anyway, I am sorry about the long post. I just thought that most of the queries on your site are related to the initial tentative steps to buying gold and silver and while I am happy that so many people are making the right decision to buy, at this point in time I’d like to get your opinions on circumstances that are likely to surround the end game for those of us who understand why we’re buying but are keen to come out on the other side wealthier than what we came in with.
PROSPECTOR REPLY: Thanks for the comment and question. Although complex, your comments are always appreciated. You are 100% correct but miss one very important aspect of your real wealth less taxation equation. I totally agree taxation will rob much wealth from gold holders (all wealth holders in fact) but rarely lose sleep over this most likely scenario, here is why.
For all the reasons you allude to, wealth will soon transfer to a few real assets or simply disappear. Let’s say the wealth that disappears equals a loss of 80% to an investor. Now, let’s say your loss from taxation equals 50%. My question, which is better off, the investor losing 80% to inflation or the PM investor losing 50% of profit to taxation?
Making money and keeping it is the ultimate team sport. Your exit strategy from PM must include a solid team that includes a like-minded tax professional. Timing this exit is a combination of monetary advancement and a period of soft taxation, at least in my opinion.
You mentioned real estate’s tax advantages. I agree that real estate offers many tax advantages but don’t agree that the US’s “fantastic low fixed interest rates” are advantages. These rates only suspend housing values beyond true market value. Today’s post speaks candidly about such false bottoms of value.
Your PM knowledge is as vast as any reader I’ve heard from. In fact, I would say you’re at mile (sorry km) marker 98 when the rest are just entering the race. You have made wise PM choices so enjoy the ride, and keep commenting too.
Oh, one other thing to recommend. Try reading Daniel R. Arman’s Inflation & Hidden Gold Taxation for more info.