Gold Run Pauses On Stronger Dollar

Posted: Nov 28, 2012 12:01 AM

Gold stayed mostly even as the dollar pushed back against the euro on Tuesday, while industrial commodities managed to move higher against the tide. 

In early trading gold was down $0.84 to $1,746.16 and silver was off $0.07 to $34.10 for a silver/gold ratio of 51.2.  Crude oil, copper, platinum and palladium were all higher in spite of the dollar moving higher. 

Commodities moving higher in opposition to moves in the currency market is generally a positive sign for the global economy but any recovery is likely to be uneven as the Organization for Economic Co-operation and Development, or OECD, cut its estimate of global growth in spite of the latest deal to keep Greece limping along. 

We can expect recovery in the U.S. to remain slow and steady but equally uneven, which is why I’m scratching my head over why people seem so anxious to jump back into the real estate market.  Sure mortgage interest rates are at record lows, that’s undoubtedly a factor for some but, just to remind everyone, real estate was becoming less of a good deal before the market meltdown that started in 2006. 

With few exceptions, real estate has historically been a poor investment.  Perhaps this article by Thomas Alexander Stephens and Jean-Robert Tyran helps explain why people seem so addicted to a class of investments that so consistently loses money.  The article is a little technical but it talks about something called nominal loss aversion.  

To calculate real returns on any investment you have to also figure in inflation and ancillary costs.  To make money your house not only has to go up in value, but it has to go up faster than the rate of inflation, plus maintenance, insurance and taxes.  There have been few times in the history of real estate when people actually made money on a house, yet they keep coming back to it like lemmings to a cliff because if people get back more than they paid they think they’re making money.

The same kind of calculation goes into any investment, including precious metals.  As we discussed yesterday, gold also performs poorly as an inflation hedge.  In the last decade gold prices rocketed above the inflation rate, but it’s hard to calculate the absolute return because of loose money policies undermining the value of our currency. 

The benefit to gold is there are no maintenance costs or ongoing taxes.  While a house is an ongoing liability, the gold in your safe quietly maintains its relative value. 

Chris Poindexter, Senior Writer, National Gold Group, Inc