John here – quick thing before we get started this morning: are you an income investor? Are you concerned about the devastation wrought on dividends by coronavirus and the lockdown?
Then don’t miss our webinar on Thursday 2 July. I’ll be talking to Iain Barnes and Matt Conradi of challenger wealth manager Netwealth about how to generate a sustainable income from your portfolio in an era of low interest rates and dividend destruction. Sign up here to watch it live (and ask questions), or view the recording later.
And now, over to Dominic...
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Did you know the average UK house price is the same as it was in 1986? It’s the same as it was in 1974 as well.
The more doubtful might at this point take to the Land Registry, and point out that in 1986 the average UK house cost around £32,000. Not the £232,000 (give or take) it costs today. In 1974 meanwhile, it was more like £9,000.
And there is where your argument breaks down. You see, you’re measuring house prices in rotten fiat money. You’re using the Great British pound – serf money. I, on the other hand, I’m using a much older and more consistent measure. I am using the money of kings.
Today we consider UK house prices measured in gold and, in doing so, we expose the extent to which you have been right royally robbed by your government, and hoodwinked by its agent in chief, the Bank of England.
Why gold makes a good financial measuring stick
We tend to think of money as the thing we use to buy and sell stuff with. Or to use the economists’ parlance, a “medium of exchange”.
But payment is not the only function of money. It is a measure of value, a store of wealth, and a standard of deferred payment (thus does it make borrowing possible).
As the verse goes:
“Money is a matter of functions four.
A medium, a measure, a standard and a store.”
Thanks largely to the extraordinary developments in communication technology we have seen over the last 150 years – the telegraph, the telephone, the radio, satellite, GPS, digital, the internet and so on – fiat money has proved a highly effective means of payment within nations (across borders it’s a lot more ploddy).
But as a measure of value it falls short. Its purchasing power is systematically debased. A hundred pounds today buys you a lot less than it did when you were a whipper snapper. Meanwhile, if you want to measure value across borders – and in today’s globalised world, who doesn’t? – you must get involved in the complex and shifting sands of foreign exchange calculations. And if you want to measure value across time and across borders – well, good luck to you is all I can say.
As a store of wealth, it also falls short. Something that has its purchasing power deliberately eroded by government policy is not a store of wealth. It is a drain of it.
And thus too as a standard does it fall short. It’s great if you’re a borrower – the value of your debt diminishes without you having to pay anything back. But if you’re the lender – hmmm. Well, that’s where banks’ ability to create money comes in. But let’s leave that for another day.
Gold, meanwhile, is a terrific store of wealth. You can smash it with a hammer, you can mould it into pretty much whatever shape you like, but there is one thing you cannot do and that is destroy it. It is eternal.
The same can be said of its purchasing power. I’m not just talking about the fact that UK house prices are the same as they were in 1974. You can look at the cost of bread in ancient Babylon, clothing in ancient Rome, meat in the time of Mohammed, or oil in the time of Rockefeller and find that the very same gold coin would buy you just as much today – more even – than it did then.
As such a formidable store of wealth, with its consistency of purchasing power, and as a standard that has had international recognition since before the dawn of civilisation, it makes an effective unit of account too, and a great standard of deferred payment.
That is why we conduct the exercise of measuring house prices in gold.
How low can UK house prices go (compared to gold)?
Here, courtesy of Nick Laird at goldchartsrus.com, the gold standard of gold charts on the internet, we see the cost of UK house prices, measured in gold, since 1955.
By this measure, the peak of the UK housing market was 2004. Sterling was (relatively) strong at more than $2 per £1. The UK housing market was booming. Gold was sitting around $400/oz.
The depths of the market came in 1980. The UK economy was weak. There was civil unrest. And gold was at the end of its epic bull market of the 1970s when it hit $850/oz. The average UK house could be bought for just 50 ounces of gold.
Today gold is around £1,400 per ounce. The average UK house is £232,000 – or 166 ounces of gold. It’s also clearly trending lower.
Where is it heading? 150 ounces, which it hit at gold’s 2011 high, looks fairly baked in.
But which are you more bullish about in today’s Covid-19 world of out-of-control money printing, duplicitous measures of inflation, civil unrest and looming unemployment?
I’d pick gold over housing. Perhaps we go below 150 and all the way to back below 100 ounces – to the lower end of the range.
What about London house prices?
London is a slightly different story to the rest of the UK. It experienced a boom in house prices in the 2011-2016 period that eclipsed the rest of the UK, as gold went through its bear market.
For the London-centric out there (me included) the average home price in London stands at £486,000 (March data) or 342 ounces of gold. By way of a snapshot for transport zones one and two, let me show you one borough picked at random. I’ve gone for Wandsworth.
Currently the average Wandsworth price is 483oz. Around 350oz was the 2011 low. In the heady heights of 2004, it was 1,300oz.
Reports are that, against the expectations of many, London is having something of a boom now the market has re-opened. It might be a function of pent-up demand. It might be low interest rates meaning no forced sellers. Who knows?
In the post-Covid “new normal”, I wonder if cities will be as desirable as they once were? On the other hand, never bet against London. Does Wandsworth go back to 350oz? Does it go lower even, or have we seen the lows already? That will be determined by the aggregation of a million or more decisions – in the gold market, in the foreign exchange markets, and in the housing markets.
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere. If you want a signed copy, you can order one here.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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