Time to sell property and equities and buy gold and silver

Posted on 03 February 2010 with no comments from readers

It is fairly easy to understand the obvious link between the greater availability of credit and rising asset prices. But less obvious is the rolling up effect or compounding of relatively small annual gains in value over very long periods of time in a credit boom.

In June this correspondent will go for a reunion of alumni in Oxford after almost 30 years of absence. Since then the price of a cup of tea on British Rail is up six-fold. The value of our former family home by a factor of 18.

Precious metal prices static

Silver is actually worth less than it was in 1980 and gold is only slightly higher. Graduates are paid around five or six times more than in 1980 when they start their first job.

Share prices are another interesting comparison to make, up around 12-fold since then but unchanged over the past decade. Houses do seem to stand out as exceptionally overvalued, at least in relation to precious metals, British Rail tea, average incomes and even stocks.

The UK housing market is a classic credit-driven asset bubble. Over time the banks have worked tirelessly to keep mortgage debt at a constant proportion of income, thus most of the benefit of falling interest rates has been lost on the general population and pushed up house prices instead.

People have also been brain washed over time into thinking a home is your best investment and can not go down (despite the 1991-3 evidence to the contrary). It is a national mania for home ownership, and even in a massive recession people are very reluctant to let go of their dream home or loss-making investment.

Of course looking back to 1980 that was the very moment to buy a UK property and sell up gold and particularly silver – which were then in an investment bubble after a decade of inflation and recessionary conditions.

Sell property, buy gold

Is not the lesson now that those caught up in the global property bubble – which is still only in its early stages of deflating if history is any guide – ought to be selling up and buying precious metals next for the upcoming multi-year upward compounding of gold and silver prices?

It is never a straight line up for any asset class. But for example that nasty 1991-93 phase in UK housing only looks a blip on the chart, although it bankrupted many young property owners at the time.

However, getting on the right side of the rising trend (and getting out of a falling trend) is the key to successful long-term investing. Ask anybody who bought a house in Britain over the past 30 years. But a rising trend is never without an end.

Obvious trends

For stock market investors the long-term trend is surely also a warning sign. The credit inflation of the 2000s has barely managed to support price levels, so how can they possibly be maintained in an era of de-leveraging and tight credit?

Surely anybody can see that near zero rate interest rates cannot last forever. And if asset prices are only being held up by low interest rates what will happen when they go up? Asset prices have to come down. This is a selling opportunity for property and stocks, and a buying opportunity for gold and silver.