Real Estate Boon or Boom? Vs Gold Asset or Liability?

June 27, 2003

Got married in 1960. Bought a house even before that. We've owned various types of real estate during the past 43 years and did fairly well financially with most of them. But, is real estate a good thing (a boon) or a bad thing (a bubble that's about to go boom) -- now -- and for the foreseeable future?

What I like to do when trying to make such a decision is to list the plusses and the minuses (following Ben Franklin's example), so here are the ones I see in real estate today. This list is far from being comprehensive, so feel free to add your own considerations. And, this letter only concerns residential property, as it's the type of real estate that's of interest to 95% of my readers:

REAL ESTATE PLUSSES

  • it's a NEST for the wife
  • it provides a foundation for the kids in which to grow up
  • it provides a stable base from which to operate, whether it's simply a residence or also an office
  • it provides the opportunity to "dig in the dirt" for those inclined to raise their own vegetables and flowers (to weed), and grass (to mow)
  • if one doesn't pay cash, it provides tax deductible interest
  • it provides the possibility of selling at a profit
  • it affords the possibility of building equity (savings)

REAL ESTATE MINUSES

  • upkeep
  • mortgage, insurance and tax payments
  • can be non-liquid
  • difficult to move (not very portable)
  • ties up money
  • difficult if not impossible to split up a city lot, or even larger parcels
  • PROPERTY TAXES - THE BIGGEST MINUS OF ALL! All the real estate plusses listed above assume you will be able to continue to pay the property taxes on your home in the future. If you can't you will lose it, and that rather clearly proves that you don't "own" your home, even if it's fully paid for.

Whether you should own a home also depends upon your age, your outlook on the economy, as well as your financial situation -- and only you can make that decision. Different people live in different stages of life, have different earning potentials, and exhibit a different risk tolerance. Some feel it's risky to buy a home at our current inflated prices, but some wouldn't feel comfortable renting.

PAY CASH OR FINANCE?

But if you do own a home, you need to decide if you should pay off the mortgage, have the largest one possible, or something in between. At my age (70) most people want to have their home free and clear so they don't have mortgage payments. Since I have a rather good income and also assets to back me up, we decided to mortgage our home to the hilt so we could acquire more holdings in gold.

We moved to this modest home 13 years ago, paying $155,000 for it. Due to the condition of the economy at the time, I was concerned that we might lose the $10,000 we put down on it. But, lo and behold, when we had it appraised a few months ago, it came in at $279,000. So, now we have a $250,000 mortgage costing us about $1,800/mo (of which $1,300 is tax deductible interest) and a lot more gold coins. In Scottsdale, AZ, you can't come close to renting a house of this value at anywhere near that $1,800 (none of which would be tax deductible). So, we have our home, a tax-deductible expense and more gold coins. While I don't pretend to be the shiniest coin in the stack, the way I see it (after being in the investment business for 45 years) is that we've simply moved about $100,000 from where it was saving us 5.5% per year in interest by being tied up as home equity, to gold coins where they have the potential of making many times that amount each year for the next several years. When the coins we hold appreciate to where we expect them to, we'll sell them and pay off the mortgage, if we decide that's best for us.

WHETHER PROPERTY VALUES RISE OR FALL, IT'S A "WIN - WIN!"

Now, if my suspicion is incorrect and we actually have a healthy real estate market for the next four or five years, then I guess I'll just refinance again or sell this place at a higher price than it is today, and invest the additional profits into something else. If, however, my analysis of the current real estate market is right and the property values are about to nose-dive, our mortgage contract says that if we stop making the payments, the bank gets the house. Well, we originally put up $10,000, but have taken out well over $100,000 by refinancing, so I don't think we'll miss the current equity of about $30,000 if we lose this house by legally defaulting. Additionally, if the current real estate bubble does go boom in the next few years, I suspect we'll be able to find a comparable home (in the then depressed market) for about half what this one is appraised at today.

And, if the real estate market gets as weak as I think it might, perhaps the banks will have to repossess so many houses that they'll find it will be to their advantage to pay us to stay here so this house won't be vacant and subject to vandals and normal deterioration. A friend (who used to be V.P. of a large national bank -- now a coin dealer, at my instigation) tells me that this is very similar to what occurred to many folks during the depression of the '30's. I can think of other interesting possibilities, too - and all of them favor our holding a large mortgage at this time in the real estate cycle. And especially with interest rates at the current levels, it simply makes a lot of sense to me. It not only makes a lot of sense, but I predict that if gold and gold coins do what I expect them to, it will make us a lot of dollars, too.

Of course, most folks refinance their homes in order to buy something (present consumption) or pay off their credit cards (past consumption), so they are simply incurring more debt on their home to save the higher interest rates required by the credit card company. While that may be admirable, what I'm doing is simply moving dollars tied up in equity in our home (costing us about 5% in interest per year) to an investment in gold that has the potential (and a past real track record) of over 200% per year. If you do the math here's what happened between 1970 and 1980: gold rose from $35 to the closing high on 1/21/80 of $825 (the interday high was $875). This means that in ten years, gold rose 2,257% on a closing price basis. You do the rest of the arithmetic if it's important to you to determine an exact annual rate of return, because I don't know how to figure compound interest rates. But it doesn't take a masters degree in mathematics to figure that it's going to be a lot more than what one needs to pay in interest for a larger mortgage on their home now.

If you haven't read "Delusions - Stocks, Real Estate, etc" by Jim Willie www.gold-eagle.com/editorials_03/willie042403pv.html, I recommend that you do so, paying particular attention to his items numbered 61, 62 & 63. Another excellent editorial is: "The Real Estate Bubble and the Coming Consumer Slowdown" by Cliff Droke. See: www.gold-eagle.com/gold_digest_03droke042103pv.html

THE FUNCTION OF GOLD

GOLD - the only tangible asset that has stood the test of 6,000 years of human history as a store-of-value, and not someone's liability.

I've been helping clients with holdings in gold bullion, gold coins and gold stocks for over 37 years, which probably gives me an edge on most gold dealers today when it comes to understanding the true function of gold. Let me illustrate gold's primary functionwith this personal story.

In 1960, I had the good fortune of meeting a pastor in our neighborhood. During one of our biblical discussions he mentioned the wisdom of holding gold coins because of their genuine, moral and ethical value compared with paper currency, which is man made and has NO intrinsic value. To make his point, he asked me what I had paid for the suit I was wearing. I told him that it had cost about $50. He held up a gold coin and told me that it was currently worth $45 and that if I were to buy one (and since they were essentially of equal value), he could absolutely assure me that I would always be able to purchase a suit of clothes for whatever the coin would be worth at any given time. Well, today, 43 years later, a decent man's suit of clothes costs about $400 and those same coins are worth just that amount. If I still had those $45 paper dollars, they'd hardly buy a decent dress shirt or tie today. Perhaps this true story will help you see the point of holding gold over paper dollars - as a store of value -- that will protect the purchasing power of your savings!

An excellent investment newsletter (International Forecaster) written by Bob Chapman, a friend for over 35 years had this to say recently: "Money has poured out of the stock market and money market funds into bonds. When interest rates rise, which they must, bond investors will be slaughtered worse than in the stock market. That is why we only have recommended government securities, shorting the market and (holding) gold and silver coins and stocks...we now see a dollar that can easily lose 60% of its value and its position as the world's reserve currency. That is going to cause great chaos as every nation and corporation tries to exit dollars simultaneously. Where do you go? You should put no less than 50% of your assets in gold and silver stocks and coins. The rest is probably in your home of which you'll lose twenty-five to seventy-five percent (unless you refinance)...We've taken our profit and we rent waiting for the correction. This is not a pretty picture, but these are the cold hard facts. This is reality." (emphasis added)

Incidentally, someone once said that the government is the only organization created by man that can take a piece of paper that has some intrinsic value, slap some ink on it and make it totally worthless -- which is what the US dollar (the Federal Reserve Note) is fast becoming (having dropped over 20% this year, relative to the euro). In case you're not aware, when you hold your savings in paper, you are holding an instrument of debt, because a "Note" (as in Federal Reserve Note) is simply an IOU something. John Exter (former Governor of a Central Bank, among many such prestigious positions), whom I had the privilege of meeting in the late '60's, said that FRN's are "I Owe You Nothings!" This is because you can't turn them in at the bank for anything except other pieces of paper. He also said that FRN's are "certificates of confiscation," because it is the easiest method for the government to separate you from your savings - by stealing your savings through the "tax" of inflation.

POTENTIAL PITFALLS INVOLVED IN HOLDING GOLD

1. Possible Confiscation: In the past, governments have seen fit to confiscate gold bullion and bullion coins. The last one occurred in 1933 in the US, and some people fear that this is very likely to occur here again. So, it's important to consider which gold holdings were exempt from confiscation in the past. If you haven't read the excellent article by Dr. Eugene C. Holloway; Gold, Money and the U.S. Constitution; http://www.gold-eagle.com/editorials_03/holloway013003pv.html I strongly encourage you to do so. In that article he stated: "Gold ownership and its usage to avoid the ravages of inflation and currency devaluation now stands as a privilege that can be revoked at any time by new legislation." (emphasis added) Although the rules may be different in the future, there are reasonable pitfalls you need to try to avoid. Some feel that there are certain types of gold coins that US citizens can hold that will not be subject to the next possible confiscation. I'm one of those people and would be willing to assist you in a careful selection of a portfolio that could save you a lot of heartache (and legal control of your gold assets) in the future.

2. Possible Nationalization of the Gold Mining Industry: Another pitfall that few have mentioned is the potential nationalization of the gold mines in the US. I dealt primarily in the South African gold mining stocks during the '70's and was always concerned that would be a problem there, but fortunately for me and my clients, that hasn't been a real problem until just recently. But, if the widely reported gold derivatives problem with banks like J.P. Morgan Chase and Citibank are real, what better way for the government to bail out those banks than to nationalize the mines and pay a predetermined fixed price per ounce, regardless of what the free market gold price might be at that time. I expect that gold stocks would be decimated! Besides, they are simply pieces of paper, not real pieces of gold.

THREE POSITIVE FACTORS FOR GOLD: editorial by Victor Hugo www.gold-eagle.com/editorials_03/hugo061003.html

"Japan has been more than just toying with deflation over the past decade or so. In desperation at its lack of success to put new life into the economy, the government is now considering a tax on cash and time deposits to prompt Japanese households into spending some of their $12 trillion of savings. The contemplated tax is said to be in the 3-5% range, compared to the less than 1% interest currently being earned.

"If it becomes fact, this tax will probably kick in with their new financial year, in April 2004. At the same time, new anti-counterfeit notes could come into circulation. Hoarders of cash will face the prospect of paying a tax to exchange their old notes for the new ones or lose the full value of their mattress money.

(This type of government theft cannot affect holders of gold coins.)

"The belief is that money will now flow into the stock exchange and into the purchase of property; perhaps also into the purchase of consumer goods. However, it is practically certain that - given Japanese culture and tradition - some of the savings and cash will be used to stock up on gold in order to avoid paying the tax. The total amount of gold ever mined, say 140 000 tons, at $350/oz is worth about $1,6 trillion. If only 0.1% of Japanese savings of $12 trillion were to flow into gold, the $12 billion would purchase 1060 tons at $350/oz - much more than what India imports in a year and almost half of annual mine production.

"Given the tight gold market of today, that could send the price into uncharted territory. And the more it climbs, the more the Japanese will switch endangered savings into gold. While the tax is still being debated and with 10 months to go before it could take effect, matters are still fluid - but do not be surprised if prudent Japanese begin to buy gold in real quantity during the next few months."

ADVANTAGES OF HOLDING GOLD COINS

Having mentioned these problem areas for some gold holdings, here are some advantages of holding real gold, especially gold coins:

  • They are small pieces of real gold held by YOU
  • Those coins are easily recognized around the world
  • Gold has been a store of value for over 6,000 years
  • It is recognized around the world as a "Precious" metal - especially in countries like China, Russia, India, Japan and many Middle Eastern countries
  • That it is a "Precious" metal is acknowledged by most Central Banks around the world - they hold the largest hoard of any one entity known to mankind
  • It is the time-proven hedge against fiat currency debasement, which our Federal Reserve has patently acknowledged as a given in this country
  • Gold has been used as a "medium of exchange" throughout human history
  • The multi-year suppression of the world spot gold price seems to have run its course, and as the free market gains the upper hand, the price will soar. A world-renowned market analyst, Richard Russell, has stated it is his opinion that as gold and the DJIA crossed at 800 in 1980, they will again cross - somewhere between 4,000 and 5,000 in the near future
  • It is easily portable, while real estate isn't
  • It's available in little pieces, allowing you to buy and sell small quantities (which is impossible for real estate), at your convenience
  • Ownership of gold coins makes it possible for you to get some of your savings out of the weakening dollar. Recently, some popular publications have referred to the US dollar as "a weapon of mass destruction."
  • Gold coins are not subject to property taxes.

WHICH GOLD COINS SHOULD YOU ACQUIRE?

Have there been differences of price appreciation in gold coins in the past? YES! Is there any reason to believe that some coins will do better than other gold coins in the future? The only logical answer to this question is to state that while past performance is no guarantee of future performance, there are coins that certainly have that potential again. In fact, some people believe that so firmly, that they are willing to pay several times the bullion value for those coins. Golden Eagle Enterprises encourages clients to have the majority of their gold dollars in those types of gold coins. "Barter" coins are also an important component of a well-balanced gold and silver coin portfolio.

"LEGAL" THIEVES OR "ILLEGAL" THIEVES?

So, having considered confiscation of gold bullion by "legal" thieves, we need to consider the "illegal" thieves. This is where storage of gold coins becomes important, although it's only been a minor problem in my 43 year experience. If you trust your local bank, you can keep your coins in a bank safe deposit box. If you're concerned that such a box might not be safe (as in confiscation or bank failures), then you might feel more comfortable by keeping your coins in a private vault company, and most major cities have at least one such company. If that doesn't fit your comfort level, there are always inconspicuous place around your residence. I have thousands of coin clients all over the country and I've only had one ever report any losses to me due to "illegal" thieves.

"LEGAL TENDER"

Some coin dealers make a big point of encouraging clients to buy US coins because they are "legal tender" in this country. I'm not favorably impressed by this label, because the agency that has decreed certain coins to be legal tender also has the right to determine the future status of those coins, among other things. In his article quoted above, Dr. Holloway had this interesting comment concerning legal tender: "The Court takes three important positions here (in a 1910 Supreme Court case). First, the power to coin money includes the power to prevent its outflow from the country. Second, even though the bullion is the property of the individual, by its conversion to legal tender, it has been impressed with the interest of the sovereign (the country, not the individual citizen of that country) and thus becomes something over which the government has the right to exercise control as part of the prerogatives of sovereignty. Third, depriving the owner of the opportunity to realize the difference between the face value and the bullion value of coins is not an unconstitutional taking of property without due process." (emphasis added)

DIVERSIFICATION

Perhaps you don't feel that either governmental confiscation or nationalization of the gold mining industry is likely, and you're holding gold bullion bars and/or coins, and gold mining stocks. Don't you think that it might be a good idea to diversify a little further, by acquiring some gold coins that would not have been subject to past confiscations - just in case this veteran of over 40 years of having been invested in gold might be right? Even Fed Chairman Alan Greenspan has said: "Gold, having both artistic and functional uses and being relatively scarce, is durable, portable, homo-geneous, divisible and therefore, has significant advantages over all other media of exchange."

AND, just in case you end up with paper dollars (Federal Reserve Notes) that aren't worth a "continental," you're going to need something else with which to pay your property taxes! A few of the right kinds of gold coins could save your home in such a scenario because you'll never live long enough to escape the liability of property taxes! However, the asset of gold coins could help you preserve the asset value of your home when nothing else may be able to.

DISPOSING OF GOLD COINS

Is there going to be a time to sell your gold coins? If history is any indication, there undoubtedly will be such a time. I remember well January 2, 1980. Gold closed at $575/oz. For several days it had been rising more per day than the total price was ($35) when I first began encouraging clients to invest some of their savings into it. It was one of those classical spikes; so reminiscent of a climax top, such as we saw again in the NASDAQ a couple years ago. Not wishing to go through another drop like we saw between 1974 and 1976, when gold dropped from $197 to $103/oz, I sent a letter to all my clients on that January day, suggesting that "…straight up moves are normally followed by straight down moves. I'm getting out of my gold positions and if you wish to do so, call me and I'll help you." Every single client (hundreds) called me within the next two weeks and I got them all out while gold was over $700. A similar day (perhaps several) is undoubtedly ahead of us again, and you need to be in touch with someone who can help you determine when that time has arrived. You might find it advisable to be acquiring your coins from someone who has already been through such a scenario to guide you. Of course, it's also very likely that you'll need to use some, if not all your gold (and silver) coins for barter, because the next major top in gold may be quite different than the one in 1980. I'd consider it a privilege to attempt to assist you in such fundamentally important decisions.

In closing, if you haven't already read: "Forget Trading Gold - Buy Physical!" by Alex Wallenwein, I'd encourage you to do so at: www.gold-eagle.com/editorials_03/wallenwein052103.html

The world’s largest gold nugget is 61 lbs, 11 oz and is on display in Las Vegas.