The
Cardinal Question of the new Millennium is:
What
has been the best investment in the past 5 years: Real Estate or Gold
Equities?
Before answering this
monumentally important question, it is imperative to appreciate the
following: To guarantee the economic stability of his family, it is
vitally essential the prudent family head should first have a home,
health and life insurance to protect his dependents against the vagaries
of life. In this regard a "home" per se can never be
considered an investment. Likewise health and life insurance are sine
qua non necessities to ensure one's family a tranquil lifestyle and
long-term peace of mind existence. Consequently, annual variations in
the value of his "home" are immaterial and irrelevant to his
family's physical stability. The "home" is for living…not
for speculating.
Once the family bread
winner has guaranteed his family's long-term economic stability (ie
home, health and life insurance), he necessarily seeks to employ his
savings via investments that promise a reasonable return in excess of
inflation in order to preserve the purchasing power of his toil.
Based upon the past 5
years performance, two outstanding investment vehicles leap to mind:
Real Estate and Gold Equities. Let's review the former first.
Real Estate in the Past 5 Years -
To be sure Real Estate
(RE) investments have commanded the greatest media attention during the
past decade. One hears about RE investments on the radio, newspapers,
magazines, TV, the Internet, telephone, word of mouth…the local
barbershop, Beauty parlor, cocktail parties, etc etc etc ad nauseam. So
pervasive and intense has RE publicity been, it has attracted hordes of
individuals from all walks of life to become RE brokers or RE
realtors…because heretofore it has been a virtual Sellers' Market for
all RE. In fact up until early last year all money thrown at any form of
RE reaped double digit yearly appreciation. It was a raging RE Bull
Market. Heretofore, impossible to lose money.
Indeed RE properties
appreciated on-balance 100% during the past 5 years. A virtual bonanza.
A perfect indication of the exciting return on RE investments is the
VANGUARD REIT Index Fund (VGSIX), which is one the nation's largest RE
mutual funds, whose Investment Objective is to acquire properties
throughout the USA to diversity risks - its Total Assets top $8 billion.
In effect VGSIX may be thought of as a surrogate for average RE
investments in the country. Indeed the total return of VGSIX in the last
5 years has been notable: $10,000 invested 5 years ago would be
worth approximately $20,000 today (see VGSIX chart showing it up 100% in
the period). A good return in anybody's book, eh? But this begs the
question: Could the investor have done better at the same level of risk?
Courtesy
of http://bigcharts.marketwatch.com
Gold Equities in the Past 5 Years -
One of the most widely
followed Gold Equities Indices is the HUI, which is considered by most
market analysts as the surrogate for the precious metals mining
industry. HUI Index is composed of 15 of the world's largest gold
producers: http://finance.yahoo.com/q/cp?s=%5EHUI
Courtesy
of http://bigcharts.marketwatch.com
During the last 5 years
HUI appreciation has blown everything else out of the water…indeed far
surpassing VGSIX RE Fund Index. The comparative chart below highlights
the Herculean difference in total return.
Courtesy
of http://bigcharts.marketwatch.com
Consider the
eye-popping difference in total return in the last 5 years:
+500%
appreciation for HUI vs. a mere +100% appreciation for VGSIX
Specifically, $10,000
invested in US RE (ie VGSIX) 5 years ago would be worth today $20,000.
Whereas $10,000 placed in the equivalent components of the HUI Index
would be worth today a whopping $60,000. In this hypothetical case the
additional $40,000 total return might be used by the household head to
finance the University Tuition of his children.
But you skeptically and
correctly say, THAT WAS THE PAST 5 YEARS, WHAT ABOUT THE NEXT 5?
Well, let's take a look
at the relative risk of both going forward.
RE Prognosis to 2010 based on history and Technical Analysis
The vast majority of
most RE investors do NOT invest in REITS, but prefer to acquire a
speculative second home or apartment, which they rent to a third party.
The RE investor therefore expects two returns, monthly rent plus annual
appreciation of his property.
It is well documented
RE has been in a bull market for over 20 years. However, not a few TA
experts conclude raging double-digit RE appreciation in the past two
years demonstrate a classic 'Blow-off' phase of an aging bull market,
which is dangerously long in the tooth. To be sure RE across the country
shows increasing evidence a new RE bear market
is emerging.
Negative News About
RE:
Fed
won't act to preserve high home prices: Kohn
'Greenspan put' theory doesn't stand scrutiny
WASHINGTON
(MarketWatch) -- The Federal Reserve has no intention of preservingall
of the recent gains in home price values, said Federal Reserve board
governor Donald Kohn on Thursday.
"If
real estate prices begin to erode, homeowners should not expect to see
all the gains of recent years preserved by monetary policy actions,'
Kohn said in a speech prepared for delivery to a European Central Bank
forum in Frankfurt, Germany.
www.marketwatch.com/News/Story/Story.aspx?guid=%7B6116173A%2DA04F%2D4
EDD%2D8D0B%2D835D37201544%7D&source=blq%2Fyhoo&dist=yhoo&siteid=yhoo
The
real-estate bubble starts collapsing …
Some of the predictions made by LEAP/E2020 already became true such as
the collapse of the real-estate bubble in the US (for the first time in
5 years, new-home sales slid 5% in January 2006 compared to January
2005; and the stock of homes for sale languishes up to 6 months, a
figure never reached since 1988). The end of the real-estate bubble will
progressively affect the consumption of US households, one highly
depending on their growing debt due to mortgage loans calculated on the
basis of their home's value. In parallel, the slow-down in the
housing-related sector will directly affect employment, knowing that
this sector alone has been providing 40% of private job creations these
5 last years in the US. Source:
New Europeans Magazine
The
Coup de Grace to the Economy - Smith
Our
Worst Nightmare - The (RE) Bubble Has Burst! - Baker
RE's prognosis for the
next 5 years is grim at best !!!!
Gold Equities Prognosis to 2010 based on history and Technical Analysis
Precious metals were in
a protracted bear market from January 1980 to early 2001. Since then
gold and silver have been in an evolving secular bull market…with
years to maturity in this protracted cycle. Presently, only one investor
in 1000 has any form of precious metal investment. As gold and silver
bull markets gather steam, the momentum will attract literally millions
of investors from all corners of the global. This will be the necessary
fuel to propel HUI to 500…and possibly to 1,000 in years to come,
before the inevitable Blow-off stage commences (as is now the case for
RE)…and IRRATIONAL EXUBERANCE pandemic sweeps the world.
Summary Of Real Estate & Gold & Silver Equities Returns
RE investments have had
their day in the sun. The 20+ year RE bull exaggeration is greatly over
extended. RE values cannot long be maintained at these fictitiously
astronomical heights. Reality will soon sweep the market, as investors
come to their sanity…as they did in the Tulip Mania of 1634, and the
infamous Florida Land Bust of the 1920s. Moreover, hapless RE investors
will sadly become aware Gold & Silver Equities have produced 400%
more total return in the past 5 years than RE investments. FURTHERMORE,
Gold & Silver Equities are liquid on a daily basis, whereas RE
investments are not. Please remember the majority of people invest in
physical RE, and not via REITs. And we all know physical RE investments
have their owners chained to a burgeoning 20 to 30 year mortgage.
ON
THE OTHER HAND,
Gold & Silver Equities' fantastic performance in the last 5 years
will slowly mesmerize and galvanize investor attention to the point Gold
Fever contagion will spread through the world -- as frantic investors
seek to place their hard earned savings in vehicles demonstrating
intrinsic value and high liquidity…like gold and silver equities.
With a view to
emphasize the modest RE return vis-à-vis the extraordinary performance
of Gold & Silver Equities, it is well worth a parting review of
comparative returns during the past 5 years…a mere 100% vs a whopping
500%, respectively.
Courtesy
of http://bigcharts.marketwatch.com
And to echo the famous
prophetic words of the incomparable TA analyst, Goldrunner:
"You
Ain't Seen Nothing, Yet !!!"
The accelerated rising
value of gold and silver equities is testament to the growing demand by
US investors from traditional stock market sources. Add to this the
humongous heretofore pent-up demand from spec RE investors. It is
estimated that the net value of all US real estate in the country is
about $20 Trillion. It is also estimated that 20% of all US real estate is
spec investments (i.e. second homes or apartments bought for investment
rather than living purposes). That
amounts to $4 Trillion, which is 36 TIMES GREATER than the
total combined market cap of all publicly owned gold and silver stocks
in the world at CURRENT PRICES ( i.e. $110,000,000,000 is the market
cap of all the world's gold stocks/equities - Source: Sept. 25,
2005, Denver Gold Conference). CLEARLY, spec investments in Real Estate
represent a huge reservoir of money that can flow toward high
performance precious metals. It then logically follows if any
fraction of spec RE monies divest their properties with the objective of
taking advantage of the formidable recent returns in Gold and Silver
Equities, precious metal values will soar to unimaginable levels.
And we must not forget
the Chinese (1.3 billion population) and Indians (1.1 billion
population) with rapidly rising income, who traditionally are large
investors in gold and silver. Together they represent an inexhaustible
growing demand for precious metals. In the near future global demand
will rise exponentially vis-à-vis a flat supply, thus eventually and
inevitably catapulting prices to the heavens.
The
Real Investment El Dorado has been, remains and will continue to be for
the next 5 years Gold and Silver Equities
March 21, 2006
I. M. Vronsky
Editor & Partner - Gold-Eagle
www.gold-eagle.com
© 2006 I. M. Vronsky
Editor & Partner, Gold-Eagle.com
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