The Gold Top & The Housing Bottom

In April, I noted that I thought the gold bull market is over. Since then, gold has fallen over 10% down to below $1400 today. That’s quite a severe correction.

Today, I found an interesting graphic showing that the gold price peaked out while housing bottomed out, and since then, the two have gone in opposite directions:

gold-125

Correlation, of course, is not causation, but this is an interesting association. Gold flourished on the back of a deep and severe correction in the housing market. Demand for gold as a countercyclical alternative asset proved very strong in the years when very few other assets and asset classes were performing, and prices soared.

So it stands to reason that a large number of individuals putting their money into gold in the boom years were putting their money there because of risks and losses in other markets and areas, and because of the belief that gold was a safe, antifragile asset for troubled times. In 2011, according to Gallup, a plurality of Americans considered gold to be the best asset class to own — something of a psychological bubble that has been burst as prices have fallen.

Indeed, in 2013, gold has been knocked off its perch by real estate — a sensational comeback given the depth of the real estate slump. Real estate, of course, was also ranked the safest in 2006 before the bubble burst. What this signifies is that money, credit and sentiment that once upon a time was flowing into gold and alternative investments is now flowing back into more traditional investments like real estate now that prices are rising again.

So long as investments like stocks and housing that produce a yield continue rising in price, the incentive driving this trend will continue to exist. Investments  once thought antifragile — gold, but also AAPL, guns and ammunition,  etc — may prove fragile to a different (and less apocalyptic) economic climate.

The last time a gold bull market ended (1980) the dollar-denominated price remained depressed for over 20 years! Perhaps this time is different, but maybe not…

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12 thoughts on “The Gold Top & The Housing Bottom

  1. Certainly a good call on gold. Then again given moderate economic growth at best, combined with stagnation in wage growth, inflation appears to be millions of miles away, lowering demand for gold. This has been evident for almost a year now.

    One thing that’s caught my attention regarding your posts is that you appear to have become bullish regarding equities & housing … u fortunately, in my opinion, its also at the peak for those two mkts, at least for the next 6-12 months. Housing recovery certainly hasn’t been a smooth one, and it appears that the mid to lower mkt is far behind the higher mkt in terms of recovery. With foreclosures declining and institutional demand continuing to increase (as they keep turning homes & land into MDUs) its surely becoming a sellers mkt. Unfortunately, growth in wages isn’t strong enough to help mid to lower tier potential buyers participate more. I think this is troubling. And there are some regions that may have just spiked up a bit too fast and too soon, which means they could take a step back. Again, given lack of enough wage/income growth, I don’t think the environment is normal enough for the buyers mkt to take over the slight bubble we’re also seeing in the rental mkt. But hey, what do I know!

    And the equity mkt is certainly overvalued. That QE premium is more than priced in. Tough to come up with fundamentals justifying where the S&P 500 is at right now. Lastly, I think Friday’s job numbers will disappoint. If that happens, the mkt could take another dump, likely worse than what we saw last Friday. From a valuation standpoint, the equity mkt remains priced to, or beyond, perfection. I won’t fight the Fed, but will certainly have some defensive options available. Again, just my 2c, which isn’t overvalued nor undervalued; priced perfectly at 2c!

    Sent from my iPhone

    • I wouldn’t describe myself as bullish on housing and equities, but I can see plenty of scenarios where they continue to go up short term and medium term.

      The things I am bullish about are technology and alternative energy, and these are long term calls that will have huge internet scale economic effects.

  2. I remember the bust of the US housing market. I was in the packed annual employees meeting with a CEO of the Consumer Division in a Major Australian Bank. I asked if due to Australia’s strong economic and employment position, whether the Bank would allow loans to invest in the US housing market. He kinda ridiculed me and said NO!

    Last I heard he was working for some Lebanese Bank.

    The US housing rebound was the biggest free lunch in history. The USA will never have a housing shortage, as every citizen of the world will beat down doors to get duel citizenship, and a piece of the USA.

    As for Gold, the current price is shuttering marginal mines in Australia, so I expect the current price to be a floor. I don’t see Central Banks liquidating and buying Bonds or Equities, other than maybe the Vietnamese Dong, or Thai Baht (Chinese contacts say production costs too high in China, and production moving to these countries.

  3. The so-called housing boom-let in the U.S. is being fueled a combination of cheap money and low government backed down payments [for some] and cash investors, private and hedge fund types [e.g., Blackrock].

    This should be over very soon as all indicators are pointing to a total slowdown in the U.S. in combination with rents decreasing in bubble areas [CA, FL, NV, AZ].

    The Fed literally threw trillions at real estate market in an attempt to create more collateral for the banks, and had limited success. The vast majority of people still can not afford to buy houses [especially in desirable areas].

    Young people are really screwed as it has become extremely difficult to save a 20% down payment. My impression is that this is the temporary blip before the next major step down in housing prices.

    Until real incomes start appreciating [for the majority] in the U.S., housing can go nowhere but down. In the area I live [south Central Coast of CA], houses are still 7x’s income. It’s a joke.

        • A median wage worker in Australia gets around $20 and hour, so make it 40k. In the older rundown less desirable places to live in Melbourne, a house that is liveable, without requiring restoration (Just tired 1950′s build) is around $300k

          Assuming your partner has a job, that’s 80K (Before Tax (At their level they would get net combined 70K – no deductions) and living costs of 26k)

          I assume living costs at that much because our government unemployment benefits around that, so we would not want unemployed people to die)

          That leaves 44k per year to pay of a loan.

          At current interest rates that are around 5% on a $300k loan, that is $15k in interest. Leaving 29K to service the loan principle.

          This assumes you have no major car bills, any luxuries spending (Welfare rates which have been declared inadequate by many groups) or your partner is sick, injured or has a baby and reduced working hours.

          Paying off a home in Australia is achievable with a lot of sacrifice. Lets hope your child from that home does not face this (The area I am quoting is in this article)

          http://www.theage.com.au/victoria/gang-bashes-teen-at-railway-station-20110317-1byf5.html

          http://www.theage.com.au/victoria/how-the-gangs-of-melbourne-have-moved-police-and-community-groups-to-search-for-answers-20120817-24dzt.html

          http://melbournism.com/where-is-melbournes-most-dangerous-place/

          This is where I grew up, and had a car load of machete wielding thugs threaten to chop my head off. Luckily one of the occupants knew me from school and said “I am cool”, let him go.

          Yes Australia has a housing problem. When society struggles so much to cause the mental anguish of parents and unsupervision of children with no employment prospects, violence is the result.

          So tell me. What is the median wage in the USA, and what is the median cost of a house where one can bring up children in an environment free of violence?

  4. You know what’s the beast’s instinct? The thrill you feel when you “know” that something is going wrong and something else is going to happen. That’s exactly what I feel when I look at the graph of the S & P500, and at the same time the yields on U.S. government bonds.
    In simple terms, it happens that the U.S. stocks are trying every day to swing in positive, but at the same time there is a significant increase in yields on U.S. government bonds. They arrive at about 2.20% / Yr, then the stocks reverse and so the bonds go down a little bit too.
    It seems to me that we have reached a kind of stalemate. Stocks are vastly overpriced and have yields too low to compete with the T-Bond, that have performance already much higher than the average yield of the S & P500 (about 1.85%).
    In addition to this, the margin debt on the U.S. stock market has returned to its historical peaks, in other words the U.S. Stock Exchange is chock-full with leveraged money (margin) as never seen before . Incidentally, the latest top happened just before the Lehman moment, in 2008.

    • Not only that, but Corporate Profits are currently running 45% above their historical average of 6% of GDP. When they get back to 6% (which they must) it won’t be pretty for the S&P.

      • Don’t forget profits have been supported by savage cost cutting. We need to analyse headline sales and Gross Margin (before) employee costs.

    • And the 1987 and 1929 Market top. Leverage is the key to determining over bought stocks. It just takes one Big Banker to get panicky and wind in liquidity, and the whole ponzi collapses.

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