Buy gold not houses

Commodities expert Dominic Frisby explains why the gold price could rise while average UK house prices could fall.

As you can see from the chart below, measured in gold the UK housing market peaked in the second half of 2004, with the average UK house (AUKH) costing the equivalent of 695 ounces of gold.

It has been in a bear market ever since: right now, with gold at £380 per ounce and the AUKH at £184,131, you can buy that house for 485 ounces.

I'll say that again using loaded language: as measured by the oldest, purest, most inflation-resistant form of money, the UK housing market has declined by 30% since 2004.

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So what next? Well, the lowest house prices have been since 1973 in terms of gold has been about 80 ounces. I can't see us getting quite that low again, but 200 ounces of gold for an AUKH isn't impossible. Indeed, a chartist would say that as it would merely mean retracing to the break-out point' it is really very likely.

How might it happen? Let's say, over the next three years, the US and the UK continue to inflate their money supplies at the same rates they are now (see chart below) and the rush to hard assets consequently gathers pace. Meanwhile, the credit crunch hits the profits of the UK banks and forces them to improve lending standards. Gordon Brown pressures the Bank Of England to lower rates, which it does, but mortgage lending rates don't come down correspondingly (due to the banks' need to make some real money) and the flood of easy money that has gone into housing continues to dry up. The housing market comes under selling pressure and, as the leading builders' stocks have already, retraces the 15% gains it has made since August 2005, back to an AUKH of £157,000.



Meanwhile, the rules regulating non-doms change, hence rich foreigners stop using the UK as a tax haven. With the number-one thing propping up our economy gone, sentiment changing, and interest rates falling, foreign money stops coming into the UK and sterling gets sold off. In this kind of scenario, we could see gold more than doubling in pounds. Add that to a 15% fall in house prices in sterling terms and you've got an AUKH costing 207 ounces, 57% less than it does now.

And what if it's worse? What happens if UK housing is so taken by bearish sentiment (maybe we get a repeat of 1989-1994) that it becomes undervalued; in the meantime, we get a run on the dollar as in 1979 (perhaps the US invades another Middle Eastern country) and gold spikes to overvalued levels?

It may not happen, of course. Gold could go down, along with house prices, leaving me stranded in a rented house in Clapham. But my guess is that in a few years those of us who chose gold over houses in 2007 will be happily ensconced in Chelsea.