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Following the Gold Proxy

In today’s environment of uncertainty, nearly every investable asset is showing divergence from historical correlations.  With the Federal Reserve increasing the money supply, US Treasury yields have gone down and the dollar has strengthened.  Oddly, the stockmarket declined while the dollar strengthened.  Hot IPOs have a strong start in initial trading only to fizzle immediately afterwards.  Meanwhile stalwart gold has emerged as a hot topic, continuing to defy skeptics with record nominal prices.  Then, is it any wonder that real estate prices continue to fall as new construction has nearly stopped and rental yields are reaching double-digits?

Needless to say, it’s hard to know what to do.  Honestly, I can offer no answers.  But, I’m inclined to follow the smart money, which happens to be the wealthy top 1% who have done well in spite of the last two bubbles and can influence the growth of their wealth.  At the moment, most of them are concerned about an imminent collapse in the value of the dollar from both record monetary expansion and giant entitlement obligations from Medicare and Social Security.  The debt ceiling may just be the proverbial straw.

So, reminiscent of other historical episodes of high inflation, the wealthy are piling into classic inflation hedges like gold and other commodities or anything able to generate strong cashflows, including performing real estate.  Some are even fancying farming.  For the masses, the implication is clear.  Unless our government engineers some massive wealth transfer from the upper classes, we might as well place our bets alongside the wealthy.

While some gold bugs are calling for gold to reach almost unimaginable highs of $5000-7000 an ounce, that is a real possibility since most people haven’t invested in gold yet.  Then again, most people didn’t believe gold can go from $700 to $1500 in just 2 years.  But, you can’t eat or live order cialis in gold.  And, it won’t pay any dividends.  So, if inflation is coming, hard assets like real estate are the safe bets and even better than gold.  Amazingly, real estate is still falling.

When is the absolute bottom?  It’s impossible to tell since the government can decide to change the game at any time.  If we assume they leave things the way they are now, then we’re likely looking at a bottom in the next 12-15 months as investors absorb the excess inventory.  The actual bottom itself will be nearly imperceptible, as it will seem to drag on indefinitely, keeping the weak buyers out of the market.  Still, knowing what properties to buy remains critical to success, just like in the stock market.

Savvy buyers are picking up quality properties that offer 8-12% returns.  If you want assistance in investing $500K-5M, please contact us.

Michael Cheng