by Neil Jesani
Historically, there have been five series for determining the value of gold. They are the British Official Price from 1257, London Market Price from 1718, U.S. Official Price from 1786 and New York Market price from 1791.
The following is the historical price of Gold from 1791 based on the New York Market:
Year
US$ Per Fine Ounce
1791
$5.32
1814
$20.10
1864
$42.03
1879
$20.67
1934
$34.94
1967
$35.00
1973
$97.81
1974
$159.74
1979
$307.50
1980
$612.56
1985
$317.66
1990
$384.93
1995
$385.50
2000
$280.00
2005
$446.00
2010
$1,227.00
2015
$1,170.00
March 25th, 2019
$1,321.70
Gold vs. Stocks
The performance of gold bullion is often compared to stocks as an investment vehicle. Gold is regarded by some as a “store of value” (without growth), whereas stocks are regarded as a “return on value” when you factor in the hope of a real price increase in the stock plus dividends. Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil.
Since 1800, stocks have consistently gained value in comparison to gold, in part because of the stability of the American political system. One argument is that in the long-term, gold’s high volatility means it doesn’t hold its value when compared to stocks and bonds.
There have been times where the price of gold has shot up through the stratosphere. This tends to happen when the United States or the world is in a very uncertain state. It is at that point that there is almost a psychological need for an investor to have something he or she can physically hang on to. The thinking goes, “The markets may tumble out of control, but I will have my gold to fall back on.”
As with any commodity — or investment for that matter — the key with gold is knowing when to invest so you can take advantage of its appreciation. Of course, the counterpoint to that is selling before the price tumbles and reallocating your investment resources elsewhere.
Oil
Investors can directly invest in oil as a commodity. There are several ways to approach this. One simple way for the average person to invest in oil is through stocks of oil drilling and service companies. Another direct method of owning oil is through the purchase of oil futures or oil futures options. Futures are highly volatile and involve a high degree of risk. Additionally, investing in futures may require the investor to do a lot of homework as well as invest a large amount of capital.
Investors can gain more direct exposure to the price of oil through an exchange-traded fund (ETF) or exchange-traded note (ETN), which typically invest in oil futures contracts rather than energy stocks. Because oil prices are largely uncorrelated to stock market returns or the direction of the U.S. dollar, these products follow the price of oil more closely than energy stocks and can serve as a hedge against a market downturn, and as a way to diversify your portfolio.
In addition, investors can gain indirect exposure to oil through the purchase of energy-sector ETFs, and energy-sector mutual funds. These energy-specific ETFs and mutual funds invest solely in the stocks of oil and oil services companies and come with lower risk.
The oil market is confusing to both professionals and the average investor alike. There are large price swings, sometimes on a daily basis. It is an industry that is constantly evolving and changing. If you look at simple supply and demand, you can see one reason prices seesaw radically. Countries like the United States actually have decreased their need for oil. Even with emerging economies having an increased requirement for it, the overall drop in demand lowers prices.
The supply side of oil used to be closely monitored by OPEC. This consortium of oil-producing countries banded together to regulate how much oil they pumped out and sold to the world. As other sources of oil outside of the OPEC nations became available, their power and influence dropped along with plummeting oil prices. As the alliance weakened, certain countries like Saudi Arabia pumped out more oil in order to maintain their level of income with the lower price per barrel. This further increased the supply of oil and contributed to even lower prices.
The volatility in investing in oil can be seen right here in the United States over the last decade. When fracking became an economic method for extracting oil from shale, areas of the country boomed with renewed economic vigor as the oil industry expanded to areas never used for oil production before. Towns sprang up around these areas with a call for workers to travel to remote parts of Texas or North Dakota. The amount of oil surged, as did profits. A few short years later, the areas are ghost towns and wells are closed as the price of oil dropped and made those operations cost prohibitive. They could very well open again when the price of oil goes up.
The oil industry is also affected by the political winds of the world. When there is the threat of war or some other major upheaval, the price of oil goes up. If war threatens an oil producing nation, the price goes up that much higher. The joke is that if a camel sneezes wrong in the Mideast, oil goes up!
Oil is also at the mercy of waves of speculation in the marketplace. Sometimes it seems like the laws of supply and demand are thrown out the window, given how much the investing dollar can affect prices. Many major institutional investors are involved in the oil markets, such as pension and endowment funds. They hold commodity-linked investments as part of a long-term asset-allocation strategy. Others, including Wall Street speculators, trade oil futures for very short periods of time to reap quick profits. Some observers attribute wide short-term swings in oil prices to these speculators.
Following is the West Texas Intermediate (WTI) or NYMEX crude oil prices per barrel beginning in 1946, according to macrotrends.net:
Currencies
As we learned in a preceding chapter, money is a commodity, and it is as actively traded as any grain or mineral. The foreign exchange market (Forex) is where currencies are traded. For speculators and investors, this market provides opportunities to take advantage of movements in exchange rates. There are different reasons why currency may be an attractive investment for certain investors.
Currency is one way to add balance to your portfolio. This is especially true if you are invested heavily in United States’ equities. The way the currency market works is if you think that the dollar will drop in the future, you can buy one or more currencies that you think will rise. A difference to keep in mind between stocks and currencies is that stocks move independently of each other, while currencies move relative to each other. This means that when one currency is rising, another must be falling.
Another consideration is that the news which can cause currencies to rise and fall is available to everyone on a real-time basis. Since events that influence a country’s economic health determine currency values, you can do your own research to judge what is going to affect any particular currency. You can select currencies based on how you perceive their relative values will change over time.
Something that currencies have in common with other commodities, as well as stocks, is their high volatility. If the value of your currencies rises against the dollar, you will profit. If your currencies fall relative to the dollar, you will lose money.
While the concept of how investing in currencies appears simple, there is substantial risk involved. You need to have an understanding of international relations and economics to help figure out how the ramifications of crucial world events will affect currency values. In today’s world, significant events can happen at a moment’s noti
ce, which can bring a huge measure of volatility to short-term currency values.
To minimize your risk, it helps to spread your investments as you would with equities. Choose countries that you will follow closely. It is best to invest in a currency whose countries have a stable banking, financial and political system.
Following is the exchange rates between the US dollar with a few representative countries’ currencies:
Year
United States
United Kingdom
Germany
Japan
China
India
Brazil
1922
$1
0.22 Pound
430.47 Mark
2.09 Yen
1.79 Old Yuan
3.48 Rupee
7.72 Milreis
1940
$1
0.26 Pound
2.49 Richsmark
4.27 Yen
16.66 New Yuan
3.32 Rupee
16.51 Old Cruzeiros
1981
$1
0.49 Pound
2.26 Deutche Mark
220.63 Yen
1.70 Yuan
9.48 Rupee
93.07 New Cruzeiros
1990
$1
0.56 Pound
1.61 Deutche Mark
145.00 Yen
4.79 Yuan
17.49 Rupee
68.30 New Cruzados
1995
$1
0.63 Pound
1.43 Deutche Mark
93.96 Yen
8.37 Yuan
32.42 Rupee
0.91 Reals
2000
$1
0.65 Pound
1.11 Euro
107.80 Yen
8.27 Yuan
45.00 Rupee
1.83 Reals
2005
$1
0.54 Pound
0.84 Euro
110.11 Yen
8.19 Yuan
44.00 Rupee
2.43
2010
$1
0.64 Pound
0.75 Euro
87.78 Yen
6.76 Yuan
45.65 Rupee
1.76 Reals
2015
$1
0.65 Pound
0.91 Euro
121.04 Yen
6.28 Yuan
64.11 Rupee
3.33 Reals
March 2019
$1
0.76 Pound
0.88 Euro
110.01 Yen
6.71 Yuan
68.93 Rupee
3.85 Reals
Summary
The average rate of return on commodities is about 7%, which is very similar to stock market averages. Depending on the commodity, natural disasters and man-made problems could greatly affect your investment. However, if you look at the broad picture, commodity investment can certainly be a valuable component of any portfolio.
As with all investments, make sure you do your research or consult an investment professional prior to committing your money. The information in this chapter is a very broad outline of the commodities market and how certain individual commodities react in the market. The more time you spend determining what works for you, the greater your comfort level will be with this type of investment opportunity.
CHAPTER 9
The Seductive World of Real Estate Investing
“The four most dangerous words in investing are ‘This time, it’s different.’”
John Templeton
R
eal estate is another type of investment with which to diversify your portfolio. It is also the oldest. By the early days of Greece, Plato and Aristotle discussed the merits and liabilities of owning land. Since those early historical days, owning real estate has been a staple of securing wealth. While the traditional manner of owning property is still the primary way of investing in real estate, we will look at some alternatives.
Owning Your Home
Depending on a person’s income level, their house is often their single biggest asset, and the place where most of their money is tied up. To many, investing in a good house is a no-brainer. It appreciates in value and whatever improvements you put into it will be reflected in the increased value of the home. As with most conventional wisdoms, that may be true overall but does not happen every single time. As with many investments, there is more to owning your home and other pieces of real estate than meets the eye. You will see that there are lessons to owning your house that also apply to most real estate transactions.
First of all, real estate is one investment where you don’t have to have all the money in your pocket in order to buy what you want. As an example, say you have your eye on a house that costs $1 million. You have $200,000 you’ve saved over a period of time. With a good income and credit rating, you go to a bank and get a mortgage for $800,000. Instead of taking years to save up the balance that you need to pay for the house, you now own it in a matter of months. There are not too many investments that give you the flexibility to get more than you can pay for right now.
Let’s say the people who purchased that home are a married couple with two teenage children. Their game plan is to own the house for ten years. By then, the kids will be out on their own, and they can sell the house, take the profit, and either downsize or buy that beach home they always had their eye on in some resort location.
It is a good plan, but there are often factors they did not take into account. First of all, as with many investments, there are no guarantees that the price of their home will appreciate. It depends on the location and the general economic environment of the sale. Back in 2008, when the price of real estate dropped dramatically, it affected many properties all over the country. Some places like Las Vegas and Florida were hit particularly hard. Individuals found themselves in the position of selling their homes and taking a big loss.
Even if your home appreciates, you have to keep in mind what you have put into your house, and not just regular maintenance and improvements. If you took out a mortgage, you are paying interest on the money you borrowed. Even with interest rates being reasonably low, that still adds up to quite a bit of money you are paying the bank. Throw in property taxes, insurance, homeowner association fees (if applicable), and utilities, and you discover that you have a good size annual expense coming out of your pocket. When you factor that in, you may find the “windfall” that you reap when you sell your home may not be as much as you thought.
This is not being negative on home ownership by any means. It is merely to show you the way many homeowners think about the financial side of home ownership. When you hear that someone received $300,000 more on the sale of their house than they paid for it, just remember that is not their net profit. While you cannot put a price tag on the emotional attachment to a home, if you run the numbers, you may find the profit may not be as great as it first appears.
For 25 years, Yale economics professor Robert Shiller has tracked U.S. home prices. He monitors current prices, yes, but he has also researched historical prices. This graph of Shiller’s data* (through January 2019) shows how housing prices have changed over time. As you can see, home prices bounced around until the mid 1910s, at which point they dropped sharply. This decline was due largely to new mass-production techniques, which lowered the cost of building a home. Prices did not recover until the conclusion of World War II and the coming of the G.I. Bill. From the 1950s until the mid-1990s, home prices hovered around 110 on the Shiller scale. For the past twenty years, the U.S. housing market has been a wild ride. We experienced an enormous bubble (and its aftermath) during the late 2000s.
*US Home Prices 1890-Present: Historical housing market data used in Robert Shiller’s “Irrational Exuberance” [Princeton University Press 2000, Broadway Books 2001, 2nd edition, 2005], shows home prices since 1890, and are available for download and updated monthly.
Real Estate as an Inv
estment
Outside of owning your home, investing in real estate is a broad category of operating, investing, and financial activities centered on making money from tangible property or producing a cash flow linked to tangible property.
In its purest form, the investor is a landlord. He or she owns the land and/or building(s). That person finds someone who wants the property and charges them rent for it. There is a psychological comfort for many investors to owning property like this. They can go to the property and see what they own. They can decorate or modify it to their heart’s content. They also have a certain degree of control reflective of the market and local regulations to charge what they want for the property. This becomes a very active investment, as the owners can be as involved in a property as they want.
If you are looking at real estate as an investment, you can own property in these broad categories: residential real estate, commercial real estate, industrial real estate, retail real estate, and mixed-use real estate. They each have their pros and cons, and many times it comes down to what a landlord feels comfortable owning. Since this chapter is devoted to a general overview of real estate, I suggest exploring in more detail the types of real estate ownership that might interest you. They all have their own unique benefits and drawbacks, economic characteristics and rent cycles, customary lease terms and brokerage practices.
