Monday, May 22, 2006

A Play on Words

Lately, many blogger's posting are referring to gold and housing as "investments." There is a point being missed here. If you consider either of those items as an investment, you are speculating.

It probably didn't start out that way, you bought the house because you needed it and you bought the gold to diversify. Both were considered a store of value. The problem arises after the asset has doubled or tripled in value.

Lets examine these two assets over the last 40 years.

In the 60's, buying a house was cheaper than renting. The saying "Buying a house is the worse investment you'll ever make, but a necessary one" made sense back then. That whole concept has been turned upside down.

Gold backed the dollar in the 60's, and it jumped from 32 dollars per troy ounce to 320 dollars, and Nixon withdrew gold from backing the dollar(Foreigners were dumping dollars for gold. If he hadn't done that, we would have lost all of our gold reserves). Without gold backing our currency, the government could turn on the presses. Gold has been dead as an investment, but its perceived image, has changed to that of a commodity. It is not viewed as a "store of value." If you examine most commodities, they get used up, and when supplies are short prices rise. Well, there is just as much gold in the world today as there was yesterday, and contrary to "implyed thinking,"it isn't being used up.

Examine the mindset of todays house buyer. The increase in home values, a 1940 1400 sq ft in Los Angles going for 1 million is getting a bit wild to say the least.

Take gold, in 1964 a pack of smokes was 24 cents, a gallon of gas was 21 cents and gold was 32 dollars an ounce. Today a pack of cigarettes is $3.50 and a gallon of gas is $3.35. An ounce of gold will still buy you just as many cigarettes and gas as it did in 1964. Ever wonder why? You can't print gold.

Notice, your perspective changes over time. It went from asset to investment. A large change in value, changed the way you perceived the item.

Whether it is a house, or an ounce of gold, it was purchased with a thought of what it was to represent, an asset or the preservation of assets. It was time that changed your perception of the asset, and if you loose track of the original concept of purchase, your well thought out plans formulated in the past can fall apart in the future. The reason, the model changed drastically, but so slowly that it was not noticed.

No comments: