Can't eat gold

[sle]

Quote from rew:


Glad you asked.

Certainly, lets have an constructive agrument. Here are a few points to start with:

(A) You should compare the total return of gold vs real estate. Even assuming that your real estate has appreciated at the rate that is slower then gold, it has been earning carry in one or another form. Either you were able to borrow money against it and offset it with rent or, if you had cash upfront, you'd collect rent or save money while living there. Gold, on the other hand, would have accrued negatively, since you would have to store it some place safe. It's safe to assume that on average real estate carried about the mortgage rate while gold accrued negative 25bp (or more, depending on your storage arrangements).

(B) Anecdotal evidence shows that residential real estate has appreciated a lot more then commercial real estate (in fact, that is the reason for a multitude of commerical to residential conversions in the recent times). Another anectodal data point (aside from the ones that I have already provided), in Mad Men there is a moment when someone is buying a 2-bedroom plus a dining room Park Avenue appartment for 35 thousand. You could probably guess what that would be worth now.

(C) I am pretty sure our RE/CMBS guys will have some data on Manhattan going back that far and I will ask them. The MIT paper looks a little bit fishy.

 

[rew]

Quote from sle:

Certainly, lets have an constructive agrument. Here are a few points to start with:

(A) You should compare the total return of gold vs real estate. Even assuming that your real estate has appreciated at the rate that is slower then gold, it has been earning carry in one or another form. Either you were able to borrow money against it and offset it with rent or, if you had cash upfront, you'd collect rent or save money while living there. Gold, on the other hand, would have accrued negatively, since you would have to store it some place safe. It's safe to assume that on average real estate carried about the mortgage rate while gold accrued negative 25bp (or more, depending on your storage arrangements).

(B) Anecdotal evidence shows that residential real estate has appreciated a lot more then commercial real estate (in fact, that is the reason for a multitude of commerical to residential conversions in the recent times). Another anectodal data point (aside from the ones that I have already provided), in Mad Men there is a moment when someone is buying a 2-bedroom plus a dining room Park Avenue appartment for 35 thousand. You could probably guess what that would be worth now.

(C) I am pretty sure our RE/CMBS guys will have some data on Manhattan going back that far and I will ask them. The MIT paper looks a little bit fishy.

Sure, you don't earn rent with gold and you do with real estate. OTOH, you don't pay annual property taxes on gold, have to fix broken plumbing, or deal with tenants who game the system and don't pay rent for months.

I suspect that if you include rent that commercial real estate would do better than gold. But it's probably not quite the big win people assume it is.

 

[sle]

Quote from rew:
I suspect that if you include rent that commercial real estate would do better than gold. But it's probably not quite the big win people assume it is.

I am sure there is NOTHING out there that massively outperformed over a long horizon, especially once you risk-adjust in some way. If there was, people would be all over it and it rather quickly would get overpriced and crash (dragging down it's risk-adjusted return and changing the world for the better).

Quote from rew:
Sure, you don't earn rent with gold and you do with real estate. OTOH, you don't pay annual property taxes on gold, have to fix broken plumbing, or deal with tenants who game the system and don't pay rent for months.

Well, both have advantages and drawbacks - if you think that you might have to flee to Butan (or whatever your favorite N/E country is), physical gold and uncut diamonds should definitely be a part of your "portfolio".

Right now I own neither commerical RE nor gold, while atcertain times in the past I was long both and liquidated one in 2006 and one just a few weeks ago. Now I am rather desperately looking for an asset of the day, but it is totally not clear what it is (a mix of T-bonds and gold has done way too well to hold on to it any longer).

The key comment I was making is that blind faith in ANY asset is not a good thing. Be it gold (yes, it has a long history, but it has fluctuated wildly through that history), real estate or anything else.

 

[peilthetraveler]

Lets also not forget that with real estate you pay all that interest on a mortgage. For a 100k house bought in 1961, you would've paid another $93k in interest charges(interest rate was 5% in 1961) And assumming taxes were 1%, over 40 years you would've paid at least another $100k or more in property taxes and dont forget insurance. And lets not forget that when you sell, you get about 90% of what you sell it for after realtor fees and closing costs. With gold it cost you about 1%-3% of spot.

And what happens if the house burns down and you lose all that rental income and have to come out of pocket to pay your property taxes, insurance, mortgage, ect. You might be out 6 months of rental income while you wait for the house to be built again.

Also, sometimes it takes months to sell, sometimes even a year to get rid a property. And if you have an expensive property it might even take longer. Where on the other hand, I can sell a billion dollars worth of gold in the next 5 minutes and have a cashiers check by next week.

There is less worth with gold and more advantages. The only time when real estate gets more of an advantage is when some seller sells below market because its a fixer upper.

 

[joneog]

Quote from sle:

Certainly, lets have an constructive agrument. Here are a few points to start with:

(A) You should compare the total return of gold vs real estate. Even assuming that your real estate has appreciated at the rate that is slower then gold, it has been earning carry in one or another form. Either you were able to borrow money against it and offset it with rent or, if you had cash upfront, you'd collect rent or save money while living there. Gold, on the other hand, would have accrued negatively, since you would have to store it some place safe. It's safe to assume that on average real estate carried about the mortgage rate while gold accrued negative 25bp (or more, depending on your storage arrangements).

(B) Anecdotal evidence shows that residential real estate has appreciated a lot more then commercial real estate (in fact, that is the reason for a multitude of commerical to residential conversions in the recent times). Another anectodal data point (aside from the ones that I have already provided), in Mad Men there is a moment when someone is buying a 2-bedroom plus a dining room Park Avenue appartment for 35 thousand. You could probably guess what that would be worth now.

(C) I am pretty sure our RE/CMBS guys will have some data on Manhattan going back that far and I will ask them. The MIT paper looks a little bit fishy.

A) As to carrying cost: 1) next to platinum gold probably has the highest $value/volume of any commodity. You can store millions worth in a small safe. Obviously there's risk of an "italian job" but there's also risk your house will burn down. 2) Couldn't you swap it or trade it foward if the basis gets out of line to earn some yield? 3)If I remembr correctly some firms were accepting gold as collateral now.

B) Comparing gold to other assets before the closing of the gold-window is problematic since $gold was trading at a fixed rate between the FDR revaluation and the breakdown of bretton woods. Any comparison in $-terms has to begin in 71' or later . You also have the problem of time frames, its hard not to cherry-pick when comparing assets that have distinct boom-bust phases.