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I
purchased my first property in 1977 which was an empty block of land east of
Melbourne and it cost $5,000. Six months later I bought the one next
door for the same figure and in 1981 I bought my first house closer to the
city, a modest three bedroom weatherboard for $41,000. Twenty six years later
this home sold for $550,000+ and has continued to rise until lately, only
faltering as interest rates climbed.
This
amounts to an inflated value of 1,341% or 13.41 times the value 28 years ago.
Back then I was able to borrow four times my average bank balance over 12
months. This meant I needed a deposit of just over 20% plus legal fees to buy
that home. I am not going to tell you housing is the ultimate bubble in this
article as I would not dare appear to attack this great Aussie institution.
People get angry if you do this to their dreams. If it is a bubble then I
will leave it up to those who are over exposed to this asset class to do
their own research and come to their own conclusions. I mention housing value
inflation over 28 years to introduce a touch of reality to two prominent
writers here in Australia.
In
this article I am not even going to tell you about the greatest debt bubble
in history and how it was unravelling like a slow motion train wreck until
the fateful events of last week. I just issued an emergency issue of the
GoldOz newsletter because the bond markets are in a state of shock and confusion.
This has massive ramifications for the Eurozone and gold however I want to
cover something else about gold today.
I
want to tell you about a Sydney Morning Herald - Business Day article I read
which had been published back on the 28th June 2010. I will put the link at
the bottom of this article to comply with web publishing rules for some
sites. This is a highly important article in some ways because it indicates
main stream sentiment about gold and came from a highly respected financial
commentator Michael Pascoe. Mr. Pascoe has done a fantastic job of informing
the Australian public about a range of financial matters over many years and
I applaud his work in general however I disagree with most of the content of
that article.
The
article talks about Macquarie Banks interest rate strategist Rory Robertson
who apparently stated that we should forget about any talk of a bubble in
Australian housing or US Treasuries. Mr. Robertson apparently won a (fun) bet
with Steve Keen (economist) who has forecast a 40% fall in Australian capital
city housing prices on a peak to trough basis.
Mr.
Keen underestimated the Governments ability to maintain inflationary policy
like new home owner’s grants (increased in response to the 2008
crisis), cash handouts and negative gearing. Mr. Keen has already paid
the debt and taken the loss by walking from Canberra to Mt Kosciusko. He took
his stance in response to the $1T+ housing debt here and learned how hard it
is to time a short sell. Mr Robertson is also predicting a fall
in property however way under 20%.
Now
to my point and the important implications of the article I am referring
to. Rory Robinson has now stated that “punters” should be
sceptical of the rise in gold from $260 to $1250 in a bubble watch article to
his clients. Rory is wise enough to state: ''It is the very nature of bubbles
that drives prices well beyond what most observers see as reasonable.
Accordingly, the price of gold over time could jump to multiples of its
current elevated price, before reversing''.
Essentially
he is stating the obvious and having a two way bet so nothing startling there
to report. The really interesting aspect of the article is the language used
and the message Michael Pascoe has promoted in the article. It is also about
the message sent to the “punters” (not my words) about gold at
this time.
For a
start the headline is “Gold price a bubble waiting to pop”. This
is a little misleading when you read the actual statement by Rory as he made
an each way bet. How long is a piece of string? Gold may go up by multiples
from here is not exactly a firm statement even if it was placed in the
context of statements about the ‘huge’ rise in the gold price
since 2001.
Firstly
let’s look at that statement. Those of you that know the gold markets
well enough will understand that gold was pushed down from 1997 by a few
powerful parties using short selling on a massive scale. To illustrate my
point one of the outcomes was the emergence of Barrick Gold Corporation which
grew from a very small operation into one of the world’s largest gold
companies on the back of profits from this practice. One could argue that
without the use of synthetic derivatives and the leveraged pre-sale of in
ground gold resources the gold price would never have dipped below
US$400.
In
this case we have seen a tripling of the price of gold in 10 years or if you
leave this adjustment out we have seen a five fold increase in the same time
period. Peak to peak from 1980 we have seen US$850 to US$1250 which is a
“massive” (?) rise of 47% in 30 years. Remember that during
this time the house I bought appreciated by 1300%. I want to know why
housing is not in a bubble, when gold apparently is, when gold is up 47% and houses
are up 13 times or 1300%?
Emotive
language in the media
The
next statement by Michael Pascoe that caught my eye was: “Fresh from
winning his bet on Australian housing prices, Robertson is taking on a much
more rabid bunch in the gold bug faithful - a broad church that ranges from
the inflation-fearful to the Armageddon brigade forecasting the end of
civilisation as we know it.”
This
was closely followed by an excerpt from Rory Robinson: ''The interesting
thing about gold - beyond it being a much-loved 'pretty rock' that several
generations ago was at the centre of the global financial system - is that it
has no `running yield', so there is no anchor, no firm benchmark for
valuation.”
Either
Rory is not aware or he is just stirring us. In the case of the former,
somebody should tell him that Central Banks are net buyers of gold as of this
year in present time. So much for that argument how false can you get?
He may be right about running yield however gold has returned an average of
over 10% per year in capital appreciation over the past 10 years so there has
hardly been any need for a direct yield has there. A quick geology lesson
might reveal for him that gold is not a rock either it is a metal. I
know he was joking in that statement however it is still a derogatory gold
comment.
The
fact that he is making such statements and that Pascoe is reporting them in
such an emotive manner smacks of a market that is not in a bubble at all. Are
we really a rabid bunch that belong to the Church (does he imply ‘cult’
perhaps) of Gold? I prefer to look at monetary policy and the
ramifications, supply and demand and other fundamental issues when I report
on gold. These factors were left out of the article in question because they
are too mainstream and don’t make good press when you are trying to
make us all out as a bunch of loonies sitting around wearing tin foils hats.
The
fact is that we have been right about debt and financial upheaval. We will
become much more right over the coming years. As a group we saw the 2008
crash coming for several years and may have looked like Dr Keen before it
actually eventuated. We have been right about the price of gold as well which
is probably why he stated: “But it's a brave soul who takes on the gold
bugs, particularly when it's seemed they've been right for the past
decade.”
Even
in this admission he used the words “seemed right” which an
invalidation of pure fact. With blatant bias like this it is no wonder
Pascoe selected this quote as well: ''For some anticipating extraordinary
financial and societal turmoil down the track, gold fits into a portfolio
rather nicely alongside automatic rifles, cases of ammo and beans, and
hilltop bunkers.'' Has he looked at Greece or Hungry lately?
Poor
misinformed public
No
wonder the average citizen is not savvy to gold yet and have been running out
buying more investment property over the past 18 months. This has slowed
lately due to the tightening of credit but still they marvel about the strong
asset performance and limitless demand for housing. When you see high
profile respected personalities like Michael Pascoe reporting on gold in this
manner no wonder people are sceptical. No wonder the general public have been
selling their gold at stands placed all over shopping centres.
The
fact that this group of commentators use such emotive language is proof, in
my opinion, of the fact that this is not a bubble. If gold were in a bubble
you would see reporting such as we now see on housing. Nobody (except
contrarians) can see a bubble when it is mature they are overwhelmed with
greed. These bubbles are generated over extended time periods which give the
impression that this is the “new normal”.
Commentators
in the main stream media are all cheerleaders at this stage of a bull market.
Everybody is an ‘expert’ on property now and they were experts on
dot com stocks at the height of that bubble too. Why does Mr Pascoe publicly
invalidate the hard fact that we have been absolutely correct to date?
Is it the fact that the Australian banking system is more exposed to mortgage
debt than any other nation? Is it that he has been such a loud supporter of
housing over recent years, or busy bagging gold out?
I
believe we are now in for a hit on gold in an asset sell off now brought
forward by events of last week which are now unfolding. I will release an
article on this subject in the next few days. Gold is still in a long term
trend and this will continue well past the correction we are about to
face.
Good
trading / investing.
Neil Charnock
Editor,
Goldoz.com.au
REGISTERED
ADVISOR – WHO THE ADVICE COMES FROM IN THE GOLDOZ NEWSLETTER:
Colin
Emery is currently a Branch Manger and Senior Client Adviser of a Stock
Broking Company in Queensland Australia. Prior to his work in Share broking
he spent nearly 20 years in Senior Management and Trading positions in Treasuries
for major International Banks such as Bank Of America, Banque Indosuez,
Barclays Bank, Bank Of Tokyo and Deutsche Bank AG. He spent a number of years
as a Senior trader in New York, London, Singapore, Tokyo and Hong Kong with
these institutions. He also was Global Head of emerging energy, emission and
commodity products for the leading Energy and Commodities brokerage firm of
Prebon Yamane Ltd – Prebon Energy for four years before moving to
Cairns in 2003 to focus on the Stock market and Private consulting work. The
private consulting and advisory work currently undertaken is with companies
involved in Resources, Energy and Renewable Energy and Forestry.
Neil
Charnock is not a registered investment advisor. He is a private investor
who, in addition to his essay publication offerings, has now assembled a
highly experienced panel to assist in the presentation of various research
information services. The opinions and statements made in the above
publication are the result of extensive research and are believed to be
accurate and from reliable sources. The contents are my current opinion only,
further more conditions may cause my opinions to change without notice. The
insights herein published are made solely for international and educational
purposes. The contents in this publication are not to be construed as
solicitation or recommendation to be used for formulation of investment
decisions in any type of market whatsoever. WARNING share market investment
or speculation is a high risk activity. Investors enter such activity at
their own risk and must conduct their own due diligence to research and
verify all aspects of any investment decision, if necessary seeking competent
professional assistance.
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