Is property as good as gold?

On Monday I said that we should have some gold ferreted away – at least 5% to 10% of our portfolios, in my view.

In response, one reader comments: “I can see the case for gold, and the related (hyper)inflation and money printing arguments. What I can’t understand is how MoneyWeek can be so pro gold and so anti property/land?”

It’s a great question. And one that I’ve grappled with myself. The question as to whether property is as good as gold is certainly one that I’ve grappled with too. In fact, thinking about this question has been very helpful to me. This is just like therapy.

Property is a real asset

Now, I have yet to meet a British person that doesn’t like housing. In fact, some of the fiercest property bears I know still own their home. What’s more, it’s usually a significant part of their overall wealth. And the MoneyWeek guys are no different.

Personally, I’ve got a reasonable slug of property in southern France. I’ve even written about German property investing in the past. It’s a shame that I didn’t have the time to take my own advice on that a couple of years ago. German property prices have risen as worried savers have turned to property. Fears of ‘eurogeddon’ mean that many German savers have come to the same conclusion as our reader – property is a real asset! Just like gold!

And yes, it is. But you need to tread carefully here.

But debt could destroy property values

The big problem with any kind of investment is how much leverage (or debt) is in the system. And note that I say ‘system’ – your own debt level is not the only consideration.

Investors and owner occupiers in residential housing tend to be highly leveraged. Just last week I was going through the business plan of a buy-to-let investor who was looking to offload her properties. There’s no equity in the property portfolio at all (even assuming her valuations are up-to-date); but thanks to low rates, the business is making an OK profit.

But what happens when rates go up? Her company, with its portfolio of 50 properties, could go bankrupt in the blink of an eye. There won’t be time for inflation to raise the value of the portfolio if they’re foreclosed. So rising interest rates could wipe her out – and take property values with her.

The gold market has proven to be frail under stressed conditions in the past. During the 2008 financial bust-up, gold took a pasting. You see, just like in housing, there’s an awful lot of leverage in the system. The vast majority of precious metals trading occurs on the highly leveraged paper-based futures exchanges.

Some estimates suggest that for every ounce of physical gold in existence, there’s a hundred ounces traded in the paper markets. And when things turn ugly investors and banks need to cut down leveraged positions, like they did in 2008. There was an almighty scramble for cash.

It’s important to note that investors without leverage suffer just the same. You might stash your gold coins under the floorboards and own a property without a mortgage, but your wealth could still fall.

“Well, I’m not selling!” is the usual answer. And fair enough, it’s a reasonable response. But at the same time, you may not be in a position to buy either. That’s why I’m in favour of a decent slug of cash in your portfolio right now. That’s the ammo we need if things turn ugly.

But it’s not just cash I think you should be holding. There are fundamental changes afoot in the financial industry. Changes that could make gold a very shrewd hold too.

Gold recognised as real money

You’ve probably heard about the Basel accords. A powerful committee of central bankers meet in the Swiss town of Basel. They decree how much capital financial institutions should hold, and what type of capital.

As I said on Monday, over the course of the last 40-odd years the world has turned to paper assets. So the Basel accords have (until now) decreed that the best type of capital a bank can have (tier 1) is cash and top-rated government bonds.

Lower down the pecking order (tier 2) you’ll find more dubious assets such as mortgages etc. And at the bottom (tier 3) are speculative assets – including gold.

The idea is that the more safe capital (tier 1) the bank has, the more it can leverage up its balance sheet.

So during the crisis, banks were inclined to sell gold (tier 3) and use it to buy government bonds or cash (tier 1).

But as of 2013, it’s understood that the incoming Basel III accord will bring with it a change to gold’s status. Stand back, wait for it…

Gold goes to tier 1!

For the first time in 42 years, gold will be considered as good as cash. No longer a third-rate asset.

Mortgage debt on the other hand will remain an outcast. Let’s not forget that many banks are reining in loans on the basis that they are trying to build capital reserves in order to meet the new Basel III accord.

The verdict on physical gold

The point is this. If we’re plunged back into crisis, I don’t think the gold price will fall like it did in 2008.

The perception of what gold is and what it does is changing, whereas the perception of paper is weakening, especially residential mortgage paper.

So, to finally answer the reader’s question: no, I don’t think property is as good as gold. Sure, bricks and mortar without debt can be a much better investment than a batch of paper promises. But remember, its value (in real terms) can plunge. My advice is to stay diversified and hold some physical gold.

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  • Ruth Colvin

    I do not understand why you advocate a good slug of cash in a portfolio when many commentators are warning of the dangers of a good slug of inflation as HMG tries to deal with the deficit. With regard to gold, you seem to be recommending that I buy an asst that you then say may well reduce in value.

  • Luke

    Ruth, the point is that there are structural reasons around the corner that will help gold maintain or more likely increase its value. Of course it might go down. Nobody has a crystal ball. While the purchasing power of your cash may go down, it keeps you liquid and agile – which cannot be underestimated in times like these.

  • phill

    Hi Bengt
    I followed your advice and hold 10% or so in PHAU gold.
    Are you able to suggest what proportion one should hold in cash?


  • David Atherton

    in return, and over, say, 10 years, some capital increase. Gold moves up and down 5% in a month, and every anti-inflationary measure, which is in the end what governments try to do, works against it. As soon as interest rates rise (and they can’t fall can they), QE will stop and gold will fall.

    Oh and stop pumping Japan. Silicon Valley and China have killed their economy forever. They will never swallow their pride and act rationally.

  • RedBaron

    Continued comments on having gold as part of one’s portfolio yet you only advocate 5-10%. Surely if you you have so much faith then it should form a larger part of portfolio. I have seen some supporters advocating 50% or even higher. I personally would go for 20-25%.
    As for David Atherton’s comments: 8% is highly optimistic in the UK although US is better (and I self manage!) and if interest rates rise then increased inflation will follow and he thinks this will cause the gold price to fall!

  • Noel Falconer

    Bengt, you don’t know what you’re talking about. What is overhanging us isn’t a foot-wetting highish tide, it’s a super-tsunami – double-double-plus!

    Exaggeration? The Hungarian currency was devalued by 400 billion-billion-billion, 4 followed by 29 zeros, times (not percent), enough to buy the entire country for pocket change in dollars or even sterling. Gold and its every analogue will be confiscated, and if your government isn’t venal enough, though that’s as unlikely as their current measures working, your property and likely your life will be taken by desperate mobs.

    And let’s meet sometime you’re in the South of France, where I live – Email me about when and just where.

  • Steve Hunter

    Dear Bengt
    I generally agree with your views on gold versus property although I do have a modest holdding in a property investment trust with a good yield. They can do all the hard work of buying, renting out etc and I can sell out easily at any time.
    However, what do you think about holding that other real estate asset -actual land, perhaps agricultural or forestry? Longer term this would seem to be the only real asset as you can actually use it to house yourself, feed yourself and even, if you choose the right plot, provide yourself with water. Gold cannot do that.

  • Francoise Bonhoure

    Some very simple and ‘innocent’ questions:
    How to hold physical gold?
    Are websites such as Goldmoney and BullionVault safe when problems arises and you want to take you gold or sell it
    Better hold accounts with GM or BV in UK or Switzerland?

  • Phil

    I wouldn’t say that UK property in general is as good as gold – far from it.

    But it is generally recognised that, since 2008 at least, central London property is the new international gold standard. Poor as an investment vehicle (price-rent ratios are over 30), but it is certainly being used as a store of wealth.

  • Peter Kellow

    @ Noel Falconer

    I am in a small circle of robust dissenting economic thinkers centred on Toulouse if that is close enough to you. I am easy to find on Yahoo! or through the democratic republican party

    As to this discussion the world always moves on and this happens because of the amazing drive by individuals and companies to invent and originate. Investors starring at their charts often forget this inviolable fact

    Gold does not follow this movement except inversely, property does normally except it is way overvalued now, cash is fine (I keep trying to explain that for investors it is asset inflation or deflation that matters not shopping basket inflation) but best of all are stocks. They map human drive

    The big problem for me in holding gold is that it makes you become a Jeremiah because for you bad news is good news. Is that how you want to live your life?

  • johnb

    your letters are always interesting and I enjoy reading your suggestions and acting on them where possible.

  • mikey

    Property as an asset class has one big drawback – you can’t get out just when you want to – there may not be a buyer, at any price … whereas gold always has a bid and an offer, even if you might not like them ….
    And I never see comments about buying gold in sterling, rather than US dollars?

  • Jim C

    out there in private hands to make it worthwhile for them to concentrate their efforts on it.

    Furthermore – a larger percentage of the stock of housing is bought on margin than physical gold is, which suggests if credit tightens, the former will be harder hit, particularly if the 100x paper gold market finally breaks.

    One thing housing definitely has going for it (in this context) is that it’s about the only thing bought on margin that doesn’t result in a margin call if its price drops below one’s equity stake; as long as you can meet the cost of carry (ie, your monthly mortgage) you won’t be forced out of your holdings waiting for the price to come back up.

  • Hector

    A small percentage of property can be compared with gold as an investment. Property with LOCATION LOCATION LOCATION.

  • Paul Collins

    Very interesting discussion. Gold in Australian dollars has gone nowhere for over a year. Surprised? Check this out…

    Gold has fallen 10% in the last year in AU$ and in US$

    You might say gold is sitting at about what it is worth.

    You can buy gold for two reasons. That it is a risk haven or it will rise strongly as a phase of the monetary crisis deepens next year. Gold is at correct market value, but what could see it double in price next year is if the central banks buy strongly.

  • charlesdb

    The problem with Gold is not when to buy it, but when to sell it. Think about it.

  • Walter London

    Someone with 50 properties, but no equity at all. How on earth is that possible? You also mention that many owner occupiers are highly leveraged. Well…in fact I know many people that bought their houses years ago, put their savings and bonuses towards the mortgage, and are now mortgage free. Especially the ones that live in the suburbs and did not buy a £500,000 studio flat in Chelsea in 2007. Although that one is probably £650k by now….

  • robin

    Compare gold against M3 money supply sometime. Its almost a perfect hedge.

    When they stop QE, that doesn’t mean m3 will go down. Right now the ‘velocity’ of money is very low. In the future this can increase quickly. So welcome to hyper inflation.

    The good thing is that this is good for people in debt. So buy a house if you are super negative. You get your house for free, but lose your job? Then again, if you want to opt out of the whole thing buy gold.

    I would like to argue that they should raise interest rates, and punish property speculators for make poor choices, but moral hazard is alive and well. Not only that but everyone is printing money, and if we want to maintain our trade levels we have to do the same. So maybe if you are only slightly negative you should leverage yourself up to the eyeballs.

  • Jim C

    @15: Paul – yes, if you’d swapped your AUD for gold you may have realised a small loss; but you could probably say that about a lot of assets, given that the AUD has been propelled upwards (like the other commodity currencies) by such strong demand out of Asia. At which point you’d have to ask yourself – how long will this continue?

    @18: Robin – I think it was Keynes (an excellent source of pithy apothegms, if nothing else) who said that if you owe your banker £100 pounds and can’t pay, you’ve got a problem; if you owe your banker £1,000,000 and can’t pay, HE’S got a problem… well, collectively, we all owe the banks trillions and can’t pay; and as our governments depends on low interest rates to turn over their mountains of debt, I can’t see interest rates (or the present pandemic of moral hazard) changing anytime soon.

  • Teresa

    Bengt, I firmly believe that UK property is in a bubble. House prices could drop 50% from here. I’m just waiting for property to crash, just as it has done elsewhere in Europe and in the States. Meanwhile, I am 100% invested in precious metals, predominantly silver.

    Looking at charts showing the gold/DOW ratio over the last 100 years, and UK property measured in gold and silver, a strong case can be made for the average UK house being worth 50 ounces of gold or 500 ounces of silver in the not too distant future.

  • DrD

    I can see the logic of holding 5% as gold, purely as an insurance. But the problem is that it’s a non-productive asset. In 10 or 20 years time your little pile of gold coins will not have grown; where as property or land will have produced something (rent, food or timber) every year…

    In terms of safety, sure land/property can be taxed. But in times of stress gold isn’t 100% safe either, it can (and has) been confiscated previously.

  • Ukrainian

    3 years ago I bought some gold on the advise of Moneyweek. At that time, gold comprised roughly 20% of my portfolio. Now it makes out about 35%. I could say that in dollar terms gold has risen by 50% since then. But what most of us forget to mention and are rarely aware of, some other assets, such as shares or property (at least in Ukraine) got thrashed during this time! Needless to say, I am sitting on my gold and have no inclinations whatsoever to dump it. I agree with some of the above comments, we will see a staggering tsunami in gold price if worst comes to pass. They (the toffs) can flirt with the price of gold until the glass is full to the brims. But when the last drop comes, it will grow in a stellar manner like there is no tomorrow.

  • Scott

    Ummmm …. did any of you ever consider silver ??

  • Citimouse

    Western economies are in a deflationary cycle after fiscal and/or monetary errors of the past 20 years. Cash is king, but return on cash is zero, and governments are slowing eroding the value of cash, and trying to increase the fiscal take. Real living standards are declining. As to gold or real estate, my builder tells me that it takes as long for a building to dry out as it does to get damp. So expect a long haul.

  • Jim C

    @23: Scott: I think silver could be great… however, it’s bulky if you’ve got a lot of money to invest (and heavy, thus reducing its portability), and in the UK its sale is subject to VAT, reducing its international price fungibility.

  • Scott

    @25 : Hi Jim: You know … It’s like in the end … who wins? The man with a pound of gold, or the man with a pound of beans? The answer of course, is neither. It’s the man with a gallon of water.
    We all exist in a world that is but one executive order away from becoming a militaristic (banking) police state. In fact, it already is. The ancient relic is not gold , it’s the US Constitution.
    At some point (hopefully) enough people will wake up to realize what has happened, and our exchanges will once again revert to the timeless value of “precious metal”. It is what it is … and will always be.

    Good luck.

  • Boris MacDonut

    Since 1983 Gold is up 250%. UK Property is up 750%, and you can’t live in Gold. So for most folk having a house has been very lucrative and they have avoided the approx £270,000 in rent that the Gld hoarder would have incurred.

  • Malkovich

    Boris, I know you are anti-gold but don’t be rediculous. The article isn’t asking should you buy a main residence or should you buy gold. It is clearly asking if excess savings should be put into property or gold.

    The point is that gold thrives in times of negative REAL interest rates, which is the exact situation at the present time. Yes, you can earn some interest on your cash, but if that is less than the rate of inflation then you are still losing. That is why it is prudent to hold gold.

    An important factor in the price of gold is obviosuly demand. The gold market is relatively small and demand is too (I don’t know anyone else who owns gold). There are currently moves under foot to make gold a Tier 1 Asset, which will increase demand considerably. This will also help to support the gold price in a panic – it won’t have to be sold to shore up reserves; gold will be as good as cash.

    For these reasons I believe that gold is still the ultimate money.

  • Steven

    I agree that bricks & mortar are not as good as gold because residential/commercial property prices are driven by price and availability of leverage; whereas gold is money. But what about land? Like gold, land is a real asset and should be a haven safe from the fiat currency abusers. However in my view gold still wins this comparison because it is more liquid than land; gold is money.

  • Malkovich

    I am sorry Boris, I meant to say you are being ridiculous, not rediculous.

  • Jim C

    @27 – Boris: and how is Real Estate looking vs Gold since (say) 2002? or 1971? Or how about US or Japanese Real Estate vs Gold? Or can declines in Real Estate only occur in silly foreign countries because they don’t have intellectual giants like Gordon Brown and Mervyn King in their own politburos?

    The thing propping up housing in the UK is our ridiculously (and unsustainably) low interest rate (and an artificial shortage caused by a restrictive regulatory framework). I wouldn’t bet on that lasting forever… and if it does, high inflation will soon see your real (as opposed to nominal) Real Estate prices plummet against commodities.

    Ironically, your post stating UK prices are up 750% in 30 years just emphasises what a bubble UK Real Estate is in, doesn’t it?

    Of course, if Europe keeps going down the pan we might see continued foreign ‘safe haven’ buying in London *chortle*

  • Paul

    #29, #31 – Hear, hear. With so much uncertainty gold is so much more liquid than a house and in real terms much more under-loved, under-owned and under-valued. It was demonetised, but if ever there was a time that gold was created for, it’s now… to extinguish such historically colossal debts.

    However, I do understand why people wish to own the property they live in. As much as renting can make sense financially, that isn’t everything. It’s just that most people consider the house they live in an asset, when it’s actually a liability, a consumer item to be enjoyed; not an investment.

  • Peter B

    One thing to remember with property vs gold, is that there is the currency risk with land. Buy UK land and Sterling tanks, although land prices will inflate with the higher inflation, in terms of other currencies the value will drop. Gold does not have this risk, is mobile and more liquid that property. Harder for the government to suddenly tax too, as no-one tracks physical gold.
    I agree that as a hard asset, property generally does well in times of inflation. For me, cash, gold, a primary property and some quality high yielding blue chips with good international income streams…. oh and guns. 🙂

  • Boris MacDonut

    #28,31 & 32. But I made no comment on which is better now or which may be better in the furure. I merely pointed out how land and property have massively outperformed Gold over the last generation ,with the added bonus for many of a place to live rent free.

  • jackanory now there is another jack

    boris 27,

    My father bought his house in 1982 and has increased by 2500%!

    It speaks for its self

  • Boris MacDonut

    #35 jack. ….and MW would say you should have bought some Gold. To be fair they have been saying since 2007/08 buy Gold. Even their editor Merryn was so convinced she sold her lovely London house in 2008 only to see it rise in value by 30%. Gold fixation writ large.

  • jackanory

    sorry just been to busy cleaning my gold. No Boris what im trying to say is house prices have alonnnnnng way to fall!


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