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The Real El Dorado: Real Estate or Gold Equities?
vronsky
The Cardinal Question of the new Millennium is:

What has been the best investment in the past 5 years: Real Estate or Gold Equities?

Before answering this monumentally important question, it is imperative to appreciate the following: To guarantee the economic stability of his family, it is vitally essential the prudent family head should first have a home, health and life insurance to protect his dependents against the vagaries of life. In this regard a "home" per se can never be considered an investment. Likewise health and life insurance are sine qua non necessities to ensure one's family a tranquil lifestyle and long-term peace of mind existence. Consequently, annual variations in the value of his "home" are immaterial and irrelevant to his family's physical stability. The "home" is for living…not for speculating.

Once the family bread winner has guaranteed his family's long-term economic stability (ie home, health and life insurance), he necessarily seeks to employ his savings via investments that promise a reasonable return in excess of inflation in order to preserve the purchasing power of his toil.

Based upon the past 5 years performance, two outstanding investment vehicles leap to mind: Real Estate and Gold Equities. Let's review the former first.

Real Estate in the Past 5 Years -

To be sure Real Estate (RE) investments have commanded the greatest media attention during the past decade. One hears about RE investments on the radio, newspapers, magazines, TV, the Internet, telephone, word of mouth…the local barbershop, Beauty parlor, cocktail parties, etc etc etc ad nauseam. So pervasive and intense has RE publicity been, it has attracted hordes of individuals from all walks of life to become RE brokers or RE realtors…because heretofore it has been a virtual Sellers' Market for all RE. In fact up until early last year all money thrown at any form of RE reaped double digit yearly appreciation. It was a raging RE Bull Market. Heretofore, impossible to lose money.

In deed RE properties appreciated on-balance 100% during the past 5 years. A virtual bonanza. A perfect indication of the exciting return on RE investments is the VANGUARD REIT Index Fund (VGSIX), which is one the nation's largest RE mutual funds, whose Investment Objective is to acquire properties throughout the USA to diversity risks - its Total Assets top $8 billion. In effect VGSIX may be thought of as a surrogate for average RE investments in the country. Indeed the total return of VGSIX in the last 5 years has been notable: $10,000 investmented 5 years ago would be worth approximately $20,000 today (see VGSIX chart showing it up 100% in the period). A good return in anybody's book, eh? But this begs the question: Could the investor have done better at the same level of risk?

Courtesy of http://bigcharts.marketwatch.com

Gold Equities in the Past 5 Years -

One of the most widely followed Gold Equities Indices is the HUI, which is considered by most market analysts as the surrogate for the precious metals mining industry. HUI Index is composed of 15 of the world's largest gold producers: http://finance.yahoo.com/q/cp?s=%5EHUI

Courtesy of http://bigcharts.marketwatch.com

During the last 5 years HUI appreciation has blown everything else out of the water…indeed far surpassing VGSIX RE Fund Index. The comparative chart below highlights the Herculean difference in total return.

Courtesy of http://bigcharts.marketwatch.com

Consider the eye-popping difference in total return in the last 5 years:

+500% appreciation for HUI
vs a mere
+100% appreciation for VGSIX

Specifically, $10,000 invested in US RE (ie VGSIX) 5 years ago would be worth today $20,000. Whereas $10,000 placed in the equivalent components of the HUI Index would be worth today a whopping $60,000. In this hypothetical case the additional $40,000 total return might be used by the household head to finance the University Tuition of his children.

But you skeptically and correctly say, THAT WAS THE PAST 5 YEARS, WHAT ABOUT THE NEXT 5 ?

Well, let's take a look at the relative risk of both going forward.

RE Prognosis to 2010 based on history and Technical Analysis

The vast majority of most RE investors do NOT invest in REITS, but prefer to acquire a speculative second home or apartment, which they rent to a third party. The RE investor therefore expects two returns, monthly rent plus annual appreciation of his property.

It is well documented RE has been in a bull market for over 20 years. However, not a few TA experts conclude raging double-digit RE appreciation in the past two years demonstrate a classic 'Blow-off' phase of an aging bull market, which is dangerously long in the tooth. To be sure RE across the country shows increasing evidence a new RE bear market is emerging.

Negative News About RE:

Fed won't act to preserve high home prices: Kohn
'Greenspan put' theory doesn't stand scrutiny

WASHINGTON (MarketWatch) -- The Federal Reserve has no intention of preservingall of the recent gains in home price values, said Federal Reserve board governor Donald Kohn on Thursday.

"If real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,' Kohn said in a speech prepared for delivery to a European Central Bank forum in Frankfurt, Germany.

www.marketwatch.com/News/Story/Story.aspx?guid=%7B6116173A%2DA04F%2D4 EDD%2D8D0B%2D835D37201544%7D&source=blq%2Fyhoo&dist=yhoo&siteid=yhoo

The real-estate bubble starts collapsing …
Some of the predictions made by LEAP/E2020 already became true such as the collapse of the real-estate bubble in the US (for the first time in 5 years, new-home sales slid 5% in January 2006 compared to January 2005; and the stock of homes for sale languishes up to 6 months, a figure never reached since 1988). The end of the real-estate bubble will progressively affect the consumption of US households, one highly depending on their growing debt due to mortgage loans calculated on the basis of their home's value. In parallel, the slow-down in the housing-related sector will directly affect employment, knowing that this sector alone has been providing 40% of private job creations these 5 last years in the US.

Source: New Europeans Magazine

The Coup de Grace to the Economy - Smith

Our Worst Nightmare - The (RE) Bubble Has Burst! - Baker

RE's prognosis for the next 5 years is grim at best !!!!

Gold Equities Prognosis to 2010 based on history and Technical Analysis

Precious metals were in a protracted bear market from January 1980 to early 2001. Since then gold and silver have been in an evolving secular bull market…with years to maturity in this protracted cycle. Presently, only one investor in 1000 has any form of precious metal investment. As gold and silver bull markets gather steam, the momentum will attract literally millions of investors from all corners of the global. This will be the necessary fuel to propel HUI to 500…and possibly to 1,000 in years to come, before the inevitable Blow-off stage commences (as is now the case for RE)…and IRRATIONAL EXUBERANCE pandemic sweeps the world.

Summary Of Real Estate & Gold & Silver Equities Returns

RE investments have had their day in the sun. The 20+ year RE bull exaggeration is greatly over extended. RE values cannot long be maintained at these fictitiously astronomical heights. Reality will soon sweep the market, as investors come to their sanity…as they did in the Tulip Mania of 1634, and the infamous Florida Land Bust of the 1920s. Moreover, hapless RE investors will sadly become aware Gold & Silver Equities have produced 400% more total return in the past 5 years than RE investments. FURTHERMORE, Gold & Silver Equities are liquid on a daily basis, whereas RE investments are not. Please remember the majority of people invest in physical RE, and not via REITs. And we all know physical RE investments have their owners chained to a burgeoning 20 to 30 year mortgage.

ON THE OTHER HAND, Gold & Silver Equities' fantastic performance in the last 5 years will slowly mesmerize and galvanize investor attention to the point Gold Fever contagion will spread through the world -- as frantic investors seek to place their hard earned savings in vehicles demonstrating intrinsic value and high liquidity…like gold and silver equities.

With a view to emphasize the modest RE return vis-à-vis the extraordinary performance of Gold & Silver Equities, it is well worth a parting review of comparative returns during the past 5 years…a mere 100% vs a whopping 500%, respectively.

Courtesy of http://bigcharts.marketwatch.com

And to echo the famous prophetic words of the incomparable TA analyst, Goldrunner: "You Ain't Seen Nothing, Yet !!!"

The accelerated rising value of gold and silver equities is testament to the growing demand by US investors from traditional stock market sources. Add to this the humongous heretofore pent-up demand from spec RE investors. It is estimated that the net value of all US real estate in the country is about $20 Trillion. It is also estimated 20% of all US real estate is spec investments (ie second homes or apartments bought for investment rather than living purposes). That amounts to $4 Trillion, which is 36 TIMES GREATER than the total combined market cap of all publicly owned gold and silver stocks in the world AT CURRENT PRICES ( i.e. $110,000,000,000 is the market cap of all the world's gold stocks/equities - Source: Sept. 25, 2005, Denver Gold Conference). CLEARLY, spec investments in Real Estate represent a hugh reservoir of money that can flow toward high performance precious metals. It then logically follows if any fraction of spec RE monies divest their properties with the objective of taking advantage of the formidable recent returns in Gold and Silver Equities, precious metal values will soar to unimaginable levels.

And we must not forget the Chinese (1.3 billion population) and Indians (1.1 billion population) with rapidly rising income, who traditionally are large investors in gold and silver. Together they represent an inexhaustible growing demand for precious metals. In the near future global demand will rise exponentially vis-à-vis a flat supply, thus eventually and inevitably catapulting prices to the heavens.

The Real Investment El Dorado has been, remains and will continue to be for the next 5 years Gold and Silver Equities


March 21, 2006

--
I. M. Vronsky
Editor & Partner - Gold-Eagle
www.gold-eagle.com


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