What Does Record Gold Mean?
Welcome to the Real Estate Espresso Podcast, your morning shot at what’s new in the world of real estate investing. I’m your host Victor Menasce. On today’s show, we’re looking at what’s happening in precious metals, and the narrative attached to those recent record-setting prices.
This past week, gold has hit new all-time record highs of just above $3,800. Many analysts are forecasting a breach of 4000 an ounce. The price peaked at $3820 an ounce this morning, surging nearly $40 an ounce in the opening moments of trading on Monday morning. So far, gold has been up nearly 10% in the last 30 days, 41% in the past year.
Of course, the purists out there would probably argue that gold has not risen, it’s in fact the dollar that’s fallen in reference to gold, and that gold is the only true historic store of value. And we’re seeing similar moves in other benchmark metals.
Silver also hit a 14-year high this week, about $47 an ounce. That’s up nearly 2% to the day, an increase of 20% for the month and 45% in the past year. It’s a similar story for platinum and palladium. Platinum is up 18% for the month, 58% for the year. Palladium is up 17% in the last month and 27% in the last 12 months.
The concern centers around inflation and inflation expectations. Government deficits show no signs of disappearing. The impact of the international trade wars also seems to be inflationary. We know that several things happen in an inflationary environment. Purchasing power for those on fixed income gets wiped out, savings get wiped out, and of course debt gets wiped out. But in an inflationary environment, where the economy is still functioning, you don’t want to be the one that’s holding the debt.
In fact, the people at Morgan Stanley just updated their recommendation for a balanced portfolio. The traditional Wall Street version of a balanced portfolio is 60% stocks and 40% bonds. However, they never mention real estate because they can’t sell real estate, and, therefore, they can’t make any money if you buy real estate assets.
What’s striking is that the latest balanced portfolio recommendation is 60% stocks, 20% bonds, and 20% in gold. This is a significant departure from a Wall Street firm that traditionally represented the most stereotypical of Wall Street recommendations. It suggests that you don’t want to be holding bonds at a time when the US government is looking to refinance a significant portion of its $38 trillion in existing debt.
We know that gold and other precious metals have one redeeming quality about them – they’re extremely liquid. You can find a ready buyer for your gold at or near the market price on any day of the week. Generally, precious metals don’t generate income. They serve purely as a hedge against inflation and as a store of value but not much else.
Real estate is also a significant hedge against inflation and serves as a store of value. All real assets, including gold and real estate, can fluctuate in value in the short term. I’ve maintained a philosophy that inflation is here to stay.
Even in traditionally financially conservative countries like Germany, they’ve relaxed their spending limits in response to the economic crises they’re currently facing. And this is how the slope always begins to slip. There’s a genuine crisis that becomes a pretext for government spending. It might be a weather event, a global pandemic, a military threat, or a financial crisis. The spending almost always is a response to a crisis. But once the spending has started, it’s tough to take away. And this is how deficit spending grows and grows and grows.
The most recent negotiations between Democrats and Republicans, with a funding deadline looming, is a proof that unsustainable deficit spending is here to stay. We will continue to face the debasement of the currency. The hedge against inflation forms the core of any investment portfolio.
We’re in an environment where selective investment in real estate, in the right asset, in the right location, at the right price, and with the correct debt structure can make a lot of sense. I laid out a lot of caveats in a single sentence, but the reality is all of those decisions do make a difference in the quality of the investment. Yes, there are many moving parts, but if you get them right, they can represent a lifetime of wealth creation and preservation.
This process requires regularly going back to look at the big picture of your portfolio and the macro environment. You want to make sure you’re not over-leveraged, and if you are, figure out the steps to take to rectify the situation and reduce your leverage. If the property’s facing some headwinds, like slow absorption or whatever the case may be, you need to figure it out and get things back on track. This is your role as the owner of the asset, or at least to make sure you have the right people managing them. These are not passive investments, but active businesses.
Buying gold and other precious metals is the core of any investment portfolio, and it’s the thing to do when you don’t know what else to do. As you think about that, have an awesome rest of your day. Go make some great things happen, and we’ll talk to you again tomorrow.
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