Yellow brick road

Share Diana Morales | Sep 15 2011

Is the road to prosperity paved with gold? Somehow it must be, but what exactly is the best path to choose is something not everyone agrees on or we would all do it – and effectively render it useless. You see, that is how markets work. There is no absolute right or wrong when it comes to investment and wealth strategies because a lot of what happens depends on the relative movements of money, themselves the result of millions of individual decisions taken by people ranging from the Rothschilds to the man on the street.

The best you can do is be well informed, rational and cool, and not too greedy, for greed is ultimately the greatest cause of bad investment when it allows us to lose our heads and become too reckless. It is usually in periods of growth and optimism that people are more likely to succumb, exposing themselves to undertakings that are too risky or committing themselves too late in the game, when the market is already overheating and they are buying into a seller’s market. In times such as these, when markets are bearish and uncertainty reigns, people prudently become more cautious, eschewing stocks, entrepreneurial investments and also property in favour of solid stores of wealth such as gold. The soaring price of gold, on a historic high of $1800 per ounce, says much about the current times, but is gold really the best place to put your money right now, or is it also overheating badly?

Gold vs Bricks
People turn to gold when they feel other more conventional investment sources will not hold their value, much less yield a profit. Though a tried and tested measure, not everybody agrees that gold is such an affective hedge against inflation, since its own value can be subject to large and sudden fluctuations. Knee-jerk reactions to market conditions are understandable amongst less savvy investors, though they do little to improve matters and actually usually make them worse, but there may be reasons why now is a good time to start dropping gold in favour of other means.

Why is it that most people buy bricks and mortar during a boom rather than during a recession? Quite simply because booms create improved job opportunities, capital accumulation through business ventures and speculation, positive equity and large profits on house sales, all of which drive upward mobility through increased earnings, savings, mortgages and loans, as well as upward house trades. All these conditions are ideal from the start of a boom up to the moment when the market becomes overheated – i.e. prices are over-valued, economic growth is already tapering off, supply has caught up with and surpassed demand, and too much debt has been accumulated.

The next stage that follows is the bursting of the bubble, and while this is often a temporary and restorative part of the economic cycle no-one wants to be left holding the baby when it happens. The best time to invest is right at the moment when a recession has reached its lowest point and the first green shoots of growth are reappearing, and the best time to bail out is when growth has run its course and is about to falter. Many brokers and investment specialists jokingly quip that when Joe Public wants to get in on the act it is time for the real investors to jump off. While this is perhaps rather arrogantly put it is also correct. The only problem is, the end of a recession and start of the next growth cycle is often hard to spot, while an overheating market is easier to recognise but takes discipline to bail out of, which brings us back to the issue of greed.

To invest wisely and safely you should be willing to forego a little growth or else risk losing far more if you stay on the train for too long. The crash that follows sees most climb out of the wreckage and head for the hills, cashing in their chips at the stock exchange and running off with gold bullion instead. The problem here is that real estate is much more difficult to offload in a slow market, where a quick sale goes at the expense of further losses. However, we are that far into the current recessive cycle that we have reached a point where gold is in danger of becoming an overheated commodity. Its inverse relationship with economic growth means that while all else has cooled off it is boiling, the fires stoked even further by an era of change and geopolitical uncertainty.

Which brings us back to bricks. The best time to have come off the property market was when it turned into a seller’s market and prices shot up in a rather speculative fashion – i.e. where price started to exceed real, or intrinsic, value. This is always a time to sell, not buy, unless you are one of those smooth operators who can buy and sell with the hit-and-run speed of a guerrilla. The point here is that now is one of the best times to buy property, be it for mid-to longer term investment or for personal use, in which case you are also a long-term investor. Gold is more likely to have peaked and drop again than continue to rise for very much longer, and while property prices have largely stopped falling they continue to represent good value in a market in which intrinsic value has once again surfaced to allow for future growth in value. After all, land is as finite as it ever was, so the old saying about bricks and mortar remains true as long as you know where and when to buy.

  • Share this post