All that glitters

- Caglan Bagci | NZIJ MORTGAGES


Now the really fascinating thing about gold is that it’s really not worth anything.  You can’t eat it, run your car with it, live in it, heat your home with it or do anything that you need to do to live.  It’s not even used for filling your teeth any more.

Gold used to be money.  A nation’s wealth was historically measured by their gold reserves.  Banks held gold in their vaults and paper money was exchanged for it.  A pound note theoretically allowed the holder to obtain a pound of gold by presenting it to the Bank of England.

The value of gold is therefore entirely emotional and nostalgic.  Gold has value as long as people feel that it has.  As paper or rather electronic money has no relation to gold anymore, why would anyone in their right mind want to exchange money for it?  Let alone $1,168 U.S. dollars for an ounce of it?  And what has this got to do with property?

Well it has quite a bit to do with property.  The reason is not so much that people feel that gold has value but rather that money doesn’t.  It is all about the ‘psychology of hedging.’  Remember that the essence of the solution to the credit crunch problem was to simply increase the supply of money.  The problem with this approach is that people don’t value money as much as they used to and this creates inflation.  Property investment 101 taught us that high inflation is good for property.  The reason for this is that people will seek tangibles in times of financial uncertainty.

Unlike money, the supply of land is constant.  If you want to get really technical you could argue that it is reducing due to climate change and rising sea levels.  Demand for land is increasing due to rising population.  If you are concerned that a war or virus may reduce human population then consider that world war two was estimated to have reduced the total human population by 2% of its pre war levels.  This 2% was regained in the year following the end of world war two.  Humanity is a survivor!

The high price of gold is an indicator of falling faith in currency.  People will seek alternatives such as gold and property.  Unlike gold property can provide rather a number of things that you need to live.

My advice is to buy now!  Property that is, although an ounce or two of gold might also be a good idea.

I am happy to respond to any questions on this article or anything in previous issues.  Send your questions to mortgages@nzij.co.nz