Ft Calls House Prices (and Whole Financial System)

[MongerOfDoom]

Since when has nuclear waste been used as money for thousands of years? If you can't see the fundamental difference between gold and nuclear waste, there's little point to this discussion.

????? The point was that it is not the rarity of an element that determines its value. I thought that was obvious.

Tell that to the people in New Orleans. Or Japan. Or any of the large numbers of historical towns and cities which simply don't exist anymore.

Did you even read what I wrote? OK, in simple terms the point was that just because it has been valuable for a long time does not mean it will also be valuable in the future. It especially does not mean that it is a good investment now.

If you'd been living in Troy thousands of years ago, you'd have protected your wealth to the present day far better by buying gold than buying a house.

I could probably do even better by carefully preserving some pottery. Gold would not have brought in rent that would have been an important part of the benefit provided by a house. Your argument works for just about anything non-perishable, such as a carefully hidden pile of gravel.

Yes. But that's true of absolutely everything: if starving to death became trendy tomorrow then even food would lose its value.

I wonder what's more likely. People deciding to show off their wealth by means other than displaying gold, or people deciding not to eat any more? If gold did not have industrial uses then it would indeed be possible that no-one would want it. The fact that it has been used as a currency is irrelevant in the long term. The fact that it is useful for making other things is relevant, however.

The simple reality is that gold is pretty much the only thing that's held its value fairly consistently for thousands of years.

Agreed.

That may all change, but the odds are good that it won't.

<{POST_SNAPBACK}>

Who knows. Stating that it won't change is unlikely to make it so. It also does not mean its price will not fall from its current level.

Thanks,

MoD

[MongerOfDoom]

Jesus, I can't believe facile, ovine, myopic banalities like the above are still cropping up on HPC. God knows how many times it's been refuted on here. Depending on what you define as "long-term", house prices have not always gone up in Germany, Japan, France, America, etc.

<{POST_SNAPBACK}>

This is just not funny. I suppose I could get away with calling you a retard given what you wrote above but I will resist, particularly seeing as it is not nice to do that sort of thing to the mentally disadvantaged. Instead I will explain what I meant in simple words, most of them monosyllabic. I wrote that sentence to point out that "the past may not be a good guide to the future". Maybe try reading it a few more times in case it helps ....

Thanks

MoD

[Smell the Fear]

[at MoD]

I guess you are one of those people that must have the last word.

<{POST_SNAPBACK}>

So it's not just me who feels battered by him? Are you a lawyer MoD? I can imagine you being absolutely rabid in the courtroom.

[Smell the Fear]

WHY GOLD IS VALUABLE:

Here's my explanation: It goes back thousands of years, but it is true to say that gold now has little underlying value in the modern world.

The reason Gold has always held value is as follows.  Thousands of years ago there was no system of currency.  This meant that if you wanted to exchange goods or services you had to exchange them directly.  I.e. if I bake bread for a living, and want to buy a goat off you, I will have to give you a hundred loaves of bread in exchange for your goat (or whatever it's market value is).  This is obviously impracticle.  It depended on everyone you needed to trade with requiring what you had to offer at any point in time (unlikely).  It also meant that the units of exchange were indivisible.  For example, the goat owner probably wouldn't require a hundred loaves of bread, just one. However, it does no-one any good trying to exchange one loaf of bread for 1% of a goat.  The goat is fairly hard to divide.  Also, the loaves of bread don't keep, they go stale.  So if you did exchange 100 loaves, you'd never get to eat most of them, so they have no value.

People needed a commodity that was both easy to exchange, could be exchanged in variable quantities, and retains it's value over time.  You can't use livestock, as individual animals are indivisible.  You can't use grain or food, as it is perishable, so hold no value over time.  However, metals were ideal.  Metal itself had a high utility value as it was used to make everything from weapons, to pots and pans... hence it had underlying value.  Not only that by you can divide metal into as large or small quantities as you want, without in any way detracting from it's value.  If I have 2kg block of metal, but need to exchange it  for something of half it's value, I can simple melt or cut it into 2x 1kg block, and exhcange one of those, for exactly half the value of the 2kg block.  The value is retained, because unlike almost anything else (e.g. livestock), when you cut metal in half, you can alway melt it down later with more metal to create a 2kg block again, hence the value is always fully proportional (try doing this to a cow).  Finally, metal also retains it's value.  If I give you 1kg of metal, and you keep it for 3 years, then in 3 years time you still have a 1kg piece of metal of the same value (this is obviously not true of bread, grain, meat, etc).  So metals retained their value over time, and as such could be used as a commodity in which to STORE wealth.

So we've established that metal not only had true value, but it also met all the necessary criteria for being a commodity suitable for use as a unit of exchange (a currency). Now, this is where gold comes in.  There are many different metals available, but the harder the metal is to come by, or the lower the quantity of it that is available, the more valuable it became.  Hence, being rare, 1kg of gold is more valuable than 1kg of silver which is more valuable than 1kg of copper.

Over history, gold being one of the rarest metals (of the day) was consider the most valuable.

However, it is right to question whether gold has real value today, or whether it's value is purely confidence based (like a FIAT currency) simply because of it's history.  I suspect this to be the case, and would suggest that OIL is actually the true gold of the modern world.

<{POST_SNAPBACK}>

I think that is an excellent summary. I would add that it is easy to underestimate how attractive gold still is to the vast majority of people in the world for it's beauty. Although elitists such as MoD may regard it as being rather passe, most of the world's population disagree with him (and are not afflicted with his snobbery). Unlike imitation jewellery it will last forever and it is likely that it will retain a great deal of its value, or even appreciate.

Also, if fiat money was abandoned, gold would be more valued due to the qualities that make it so ideal as a medium of exchange. For this reason it would be sensible for people to hold a small proportion of their wealth in gold (even just 1%) as a hedge against the possibility of fiat currency imploding.

I would say that the price of gold incorporates the following today: rarity, technical applications, suitability as a medium of exchange, its inert nature, intrinsic beauty, and faith in it as a source of value (although perhaps this faith value is a rational product of all of the other qualities?).

The individual values of these factors can increase for various reasons. For example, its suitability as a medium of exchange is probably currently rising from its historic low (as faith in fiat currency declines from its peak). The technical applications value can change with industrial demand, although I suspect this accounts for a small proportion of its value.

Attractiveness is of course subjective. It may be out of fashion with some people, but the world is still diverse enough for the risk of this losing all of its value to be low (i.e. everyone in the world thinking it out of fashion at the same time).

Does anyone know how the real price of gold has changed historically? Did it lose a huge portion of its value when the gold standard was abandoned?

edit: typo

Edited September 10, 2005 by Smell the Fear

[MarkG]

Does anyone know how the real price of gold has changed historically?

In terms of what it can buy, I believe it's remained fairly constant throughout recorded history.

Did it lose a huge portion of its value when the gold standard was abandoned?

No, it increased in value by an order of magnitude over the next few years (I presume you're referring to Nixon ending the dollar gold standard?). If I remember correctly, gold was about $50 an ounce when Nixon defaulted on gold convertibility, and peaked at $850 a few years later.

The gold price only dropped back to today's levels when the Fed pushed interest rates high enough to dramatically reduce inflation. If we get another period of stagflation I wouldn't be surprised to see $5,000 gold... but I wouldn't _want_ to see that because the effects on the rest of the economy would be devastating.

Edited September 10, 2005 by MarkG

[Smell the Fear]

In terms of what it can buy, I believe it's remained fairly constant throughout recorded history.

No, it increased in value by an order of magnitude over the next few years (I presume you're referring to Nixon ending the dollar gold standard?). If I remember correctly, gold was about $50 an ounce when Nixon defaulted on gold convertibility, and peaked at $850 a few years later.

The gold price only dropped back to today's levels when the Fed pushed interest rates high enough to dramatically reduce inflation. If we get another period of stagflation I wouldn't be surprised to see $5,000 gold... but I wouldn't _want_ to see that because the effects on the rest of the economy would be devastating.

<{POST_SNAPBACK}>

Can you clarify: in terms of what it can buy it remained fairly constant. So during the Nixon period you describe were other goods prices inflating to the same extent? i.e. $50 of goods soon cost $850?

Or was this a bubble in gold value that you excluded from the statement that it remained fairly constant in terms of what it could buy?

[oracle]

it is worth being careful with the comparisons in gold etc between now and the last upswing of 30 years ago.

...don't forget that some of these commodities,oil included ought to be adjusted for inflation....if you want a true measure of 70's oil crisis prices it's probably more like $200bbl in todays money,so $70 is quite tolerable.

...same is true of gold+commodities in general.

I am a commodity bull for this cycle,I think we will be going up for the next 7-8 years....I do have some holdings too,but before anyone gets too carried away with the bubble it's worth pointing out that when prices rise then alternatives that looked dead in the water a few years ago suddenly look very viable.....hence my punt on nukes/waste management......which will in turn help to reduce demand.

[MarkG]

The 70s were definitely a bubble in the gold price, though prices of other things did increase a lot too. That's why it dropped so rapidly from $850 when the government began to get serious about inflation and the bubble burst.

That's also why I said 'fairly constant', rather than 'constant'...

[Smell the Fear]

The 70s were definitely a bubble in the gold price, though prices of other things did increase a lot too. That's why it dropped so rapidly from $850 when the government began to get serious about inflation and the bubble burst.

That's also why I said 'fairly constant', rather than 'constant'...

<{POST_SNAPBACK}>

Thanks.

[MongerOfDoom]

I would say that the price of gold incorporates the following today: rarity, technical applications, suitability as a medium of exchange, its inert nature, intrinsic beauty, and faith in it as a source of value (although perhaps this faith value is a rational product of all of the other qualities?).

Let me suggest four pairs of statements:

Gold has intrinsic beauty.

Gold is a better store of value than most currencies that ever existed.

It does not really matter if gold has uses in industry or not.

Gold is rare and difficult to mine.

People are emotionally attached to housing.

Houses always go up in the long term.

Just buy a few houses, they will make you lots of money even if no-one lives there.

They are not making any more land.

It seems to me that few on this board would argue that housing can remain priced in a way that allows a wide disparity between rents and capital values. Yet at the same time several posters in this thread consider 'faith' in gold and the fact that it has been successfully used as a store of value in the past to be a sufficient guarantee of its long-term value, even in a (hypothetical) situation where the industry no longer needs it. I wonder what it is that I am missing.

Thanks,

MoD

PS:

So it's not just me who feels battered by him? Are you a lawyer MoD? I can imagine you being absolutely rabid in the courtroom.

I wish. It has already been suggested by others that I should consider pursuing such career. Anyway, sorry to 'batter' you.

I guess you are one of those people that must have the last word.

It would be even more constructive if you could point out which of my comments you thought did not need making. Then again, time spent reading this board would seem wasted if it were not for poinless one-line responses

[Smell the Fear]

Let me suggest four pairs of statements:

Gold has intrinsic beauty.

Gold is a better store of value than most currencies that ever existed.

It does not really matter if gold has uses in industry or not.

Gold is rare and difficult to mine.

People are emotionally attached to housing.

Houses always go up in the long term.

Just buy a few houses, they will make you lots of money even if no-one lives there.

They are not making any more land.

It seems to me that few on this board would argue that housing can remain priced in a way that allows a wide disparity between rents and capital values. Yet at the same time several posters in this thread consider 'faith' in gold and the fact that it has been successfully used as a store of value in the past to be a sufficient guarantee of its long-term value, even in a (hypothetical) situation where the industry no longer needs it. I wonder what it is that I am missing.

<{POST_SNAPBACK}>

House prices are largely influenced by the money supply. Money supply has exploded, house prices followed.

People tend not to borrow large multiples of their salary to buy gold.

I await your extensive and mentally debilitating answer........

[MongerOfDoom]

House prices are largely influenced by the money supply.

<{POST_SNAPBACK}>

So is just about any other good, including rented housing.

Money supply has exploded, house prices followed.

Are you really arguing that houses are fairly valued because money is now plentiful?

People tend not to borrow large multiples of their salary to buy gold.

They might start to if gold keeps going up for a bit longer. That might in turn happen if enough people get convinced we are all DOOOOOMED by fractional reserve banking, increased production of black helicopters, fiat money, peak oil, or whatever the most acute danger might be that particular week

Either way, my question remains. Why is it fine for the price of gold to be out of line with its intrinsic value but not for the value of housing? I have no idea what the intrinsic value of gold is at the moment but it seems a safe guess that it would be very much lower in a world where the industry succumbed to a global economic meltdown. I still think that stocking up on gold as an insurance against this is not all that clever, except possibly if the plan is to dispose of said gold before everyone else realises it will not become useful until the civilisation gets rebuilt.

Thanks,

MoD

[Hino98]

Let's not fight over a bit of the 'yellow stuff' folks. ......here's one I prepared earlier

[GCS15]

I'm a big fan for everything going back to the mean. House prices will revert to the historical ratio with average wages. I am also certain that the metals will revert to what they once were. Fiat has failed in the past and will fail in the future. Australia has been off the gold standard for 74 years. That's not that long in the scheme of things. Sure we have new technology that allows the harvesting of grain etc. But Silver looks like an awsome prospect. More so than gold. There is less Silver in the world than gold and it is consumed. It is at bargain prices and if it reverts back to the mean (1 days average pay) I'll be happy. Silver is so cheap that it is not worth mining at the moment. Any new mine will take time to get on-line. In the mean time I'll keep adding to my stockpile at $10-$15 an Oz (smaller coins) in bullion coins.

For those who are on bigger moolah I do think that gold is the go as well. It's just that I am a poor uni student

[GCS15]

600 years of silver prices

[Smell the Fear]

So is just about any other good, including rented housing.

<{POST_SNAPBACK}>

People do not take out loans to pay the rent, as a general rule. It is an expense. The asset purchased is consumed. Therefore we don't speculate on rents (or at least not in a geared manner).

Are you really arguing that houses are fairly valued because money is now plentiful?

<{POST_SNAPBACK}>

Money is too plentiful. The mortgage is the means by which the money supply is expanded. When the lenders start to lose money from bad debts the money supply will contract and prices will drop. Investing in property does not stack up financially. Buying rather than renting does not stack up financially. This is evidence of the lack of efficiency in the housing market. It takes a long time for reality to feedback and restore balance.

They might start to if gold keeps going up for a bit longer. That might in turn happen if enough people get convinced we are all DOOOOOMED by fractional reserve banking, increased production of black helicopters, fiat money, peak oil, or whatever the most acute danger might be that particular week 

<{POST_SNAPBACK}>

That seems extremely unlikey given that the money supply is likely to contract.

Either way, my question remains. Why is it fine for the price of gold to be out of line with its intrinsic value but not for the value of housing? I have no idea what the intrinsic value of gold is at the moment but it seems a safe guess that it would be very much lower in a world where the industry succumbed to a global economic meltdown. I still think that stocking up on gold as an insurance against this is not all that clever, except possibly if the plan is to dispose of said gold before everyone else realises it will not become useful until the civilisation gets rebuilt.

<{POST_SNAPBACK}>

Property is overvalued on a number of yardsticks. There is no money in BTL. It is cheaper to rent than buy.

How can you say gold is above its intrinsic value when you admit that you have no idea what the intrinsic value is?

The purchasing power of gold would probably be a lot, lot higher in an economic meltdown due to all of the reasons previously discussed. Particularly its suitability as a means of exchange (a compact store of value that is difficult to fake probably being the main one).

Go on, punish me! I asked for it!

[MongerOfDoom]

People do not take out loans to pay the rent, as a general rule. It is an expense. The asset purchased is consumed. Therefore we don't speculate on rents (or at least not in a geared manner).

In the same way that they do not take out loans to pay for expensive cars or even holidays? I see you have not had the pleasure of meeting the common chav just yet There apears to be anecdotal evidence of people with large debts who have little to show for the increased spending while the debt was run up, other than that they could sustain higher living expenses.

I don't think it matters who takes out a loan and for what purpose since the money will find its way into the wider economy one way or another (rather than be forever reinvested e.g. in a bubble afflicted asset class used as security for the loan). The loaned money will eventually be earned by people who will not expect their earnings to decrease and who will therefore be happy to spend them on rent.

Money is too plentiful. The mortgage is the means by which the money supply is expanded. When the lenders start to lose money from bad debts the money supply will contract and prices will drop.

It is now much easier to spend in one go much of all money you will yet be able to earn. This does not inherently make money plentiful. It will have to paid back unless it is written off but in that case it will be the banks' shareholders who will need to cut back on consumption a bit. Alternatively, it could be those of us with any money left in case said banks need to be bailed out by the taxpayer. Either way, my opinion is that the current house prices are a case of resource misallocation rather than a case of magic money suddlenly appearing from somewhere.

I am happy to hold my assets predominatly in cash. You might not care much to follow my example but I could just be onto something given that others, reportedly including Warren Buffet, also have large cash positions as proportions of their wealth. Also, this strategy would have worked very well in Japan aroud the time their bubble(s) burst. If money was becoming increasingly plentiful then such strategy would be much less than wise. What am I missing about the value of money? If it is going to be more valuable after the bubble bursts then it is certainly not being cheapened now. [2]

To put all this another way, there is a housing bubble. I am not convinced the price increases are somehow caused by money devaluing (which would probably mean there was not a bubble after all).

Investing in property does not stack up financially. Buying rather than renting does not stack up financially. This is evidence of the lack of efficiency in the housing market. It takes a long time for reality to feedback and restore balance.

Agreed.

That seems extremely unlikey given that the money supply is likely to contract.

Just a minor point that will probably not be relevant in Britain. If you give people a sufficiently big bubble then in the absence of an easy source of credit they will reduce consuption in order to purchase whatever it is that is rising in price. This reportedly happened in Eastern Europe when the outbreak of the various Ponzi schemes was at its peak some years ago.

How can you say gold is above its intrinsic value when you admit that you have no idea what the intrinsic value is?

I cannot, and didn't. I merely claimed that the intrisic value will go down in case of mass economic meltdown. *If* this argument holds, and *if* it is true that the price of gold must be close to its intrinsic value in the long run then this would mean that gold is not a good asset to hold in order to hedge against an economic collapse [1]

The purchasing power of gold would probably be a lot, lot higher in an economic meltdown due to all of the reasons previously discussed. Particularly its suitability as a means of exchange (a compact store of value that is difficult to fake probably being the main one).

<{POST_SNAPBACK}>

Bits of paper with pretty pictures on them are even more suitable (easier to carry around, also hard to fake). The way I see it, the only difference is that the bits of paper would be very unlikely to have any intrinsic value in a situation where the state cannot collect taxes whereas gold might. I argued above that it probably wouldn't but it is not clear if the assumptions I made were right and just how long was the assumed 'long term'. I would not buy a non-trivial amount of gold myself even if I though all world economies were about to fall over.

Thanks,

MoD

[1] Obviously, this also assumes that gold is not massively undervalued currently but then just about any such asset would be good to hold.

[2] this is not a deliberate bait for goldbugs although I am pretty sure they will bite

PS:

Durch: I was not offended and no apology was needed. It was hardly the worst thing you could tell someone on an open forum, plus on occasions I can be a little nasty to others myself!

[Smell the Fear]

In the same way that they do not take out loans to pay for expensive cars or even holidays? I see you have not had the pleasure of meeting the common chav just yet    There apears to be anecdotal evidence of people with large debts who have little to show for the increased spending while the debt was run up, other than that they could sustain higher living expenses.

I don't think it matters who takes out a loan and for what purpose since the money will find its way into the wider economy one way or another (rather than be forever reinvested e.g. in a bubble afflicted asset class used as security for the loan). The loaned money will eventually be earned by people who will not expect their earnings to decrease and who will therefore be happy to spend them on rent.

It is now much easier to spend in one go much of all money you will yet be able to earn. This does not inherently make money plentiful. It will have to paid back unless it is written off but in that case it will be the banks' shareholders who will need to cut back on consumption a bit. Alternatively, it could be those of us  with any money left in case said banks need to be bailed out by the taxpayer. Either way, my opinion is that the current house prices are a  case of resource misallocation rather than a case of magic money suddlenly appearing from somewhere.

I am happy to hold my assets predominatly in cash. You might not care much to follow my example but I could just be onto something given that others, reportedly including Warren Buffet, also have large cash positions as proportions of their wealth. Also, this strategy would have worked very well in Japan aroud the time their bubble(s) burst. If money was becoming increasingly plentiful then such strategy would be much less than wise.  What am I missing about the value of money? If it is going to be more valuable after the bubble bursts then it is certainly not being cheapened now.  [2]

To put all this another way, there is a housing bubble. I am not convinced the price increases are  somehow caused by money devaluing (which would probably mean there was not a bubble after all).

Agreed.

Just a minor point that will probably not be relevant in Britain. If you give people a sufficiently big bubble then in the absence of an easy source of credit they will reduce consuption in order to purchase whatever it is that is rising in price. This  reportedly happened in Eastern Europe when the outbreak of the various Ponzi schemes was at its peak some years ago.

I cannot, and didn't. I merely claimed that the intrisic value will go down in case of mass economic meltdown. *If* this argument holds, and *if* it is true that the price of gold must be close to its intrinsic value in the long run then this would mean that gold is not a good asset to hold in order to hedge against an economic collapse [1]

Bits of paper with pretty pictures on them are even more suitable (easier to carry around,  also hard to fake). The way I see it, the only difference is that the bits of paper would be very unlikely to have any intrinsic value in a situation where the state cannot collect taxes whereas gold might. I argued above that it probably wouldn't but it is not clear if the assumptions I made were right and just how long was the assumed 'long term'. I would not buy a non-trivial amount of gold myself even if I though all world economies were about to fall over.

Thanks,

MoD

[1] Obviously, this also assumes that gold is not massively undervalued currently but then just about any such asset would be good to hold.

[2] this is not a deliberate bait for goldbugs although I am pretty sure they will bite 

PS:

Durch:  I was not offended and no apology was needed. It was hardly the worst thing you could tell someone on an open forum, plus on occasions I can be a little nasty to others myself!

<{POST_SNAPBACK}>

A quick read of your post confirms that you have no points to make, so I'll leave it there. I expect you'll be back to get the last word.