Jeff Clark, Senior Precious Metals Analyst, GoldSilver
JUL 31, 2018
Real estate prices look to be topping out. Gold and silver prices are back at 2010 levels. As the relative pricing of these two assets reverses over the coming years, it will afford those with a meaningful holding of precious metals the opportunity to buy a house outright.
That may be a bold statement, but it’s based on the historical relationship between these two asset classes. They tend to be (though are not always) inversely correlated, so as one gets overvalued you tend to find the other one undervalued. Outside of the stock market, real estate prices have of the strongest inverse correlations to the price gold and silver.
Here’s the historical relationship between the price of the average US home and the price of an ounce of gold over the past 43+ years (house price divided by gold price). The highs and lows are marked.
You can see that at gold’s peak in 2011, it took only 143 ounces of gold to buy the average-priced home in the US. And when gold peaked in 1980, it took a mere 106 ounces.
If real estate is indeed topping out — there are reports that both sales and supply are reversing — and you accept even half of what Mike Maloney thinks is ahead, then property should be sold now and gold bought. And then wait for the ratio to reach an extreme low and swap back.
That “extreme low” likely won’t occur until the real estate/gold ratio falls below 100. That’s because unlike the 1970s, most major asset classes are in a bubble today, something history has rarely witnessed… the global financial system is much more precarious now, particularly when you include widespread money printing that wasn’t present then… and debt loads are at all-time highs for most segments of society — government, corporate credit, global credit, student loans, auto loans, derivatives, and unfunded liabilities for both federal and many states. Add it all up and it is hard to imagine a scenario where gold and silver do not soar in the upcoming fallout. So yes, a gold/real estate ratio below 100 is not just possible but probable.
But it’s not gold’s ratio that has my mouth watering. It’s silver. Here’s the historical relationship of silver and real estate since 1975, also with the highs and lows marked.
You can see how extreme the readings have been, which is due to silver’s high volatility. We’ll use that volatility in our favor, as a repeat of just 2,052 ounces to buy a house is highly likely. As with gold, though, the ratio will probably drop even further in the type of crises we see ahead.
So yes, four monster boxes of silver could indeed buy you an average-priced home at the bottom of the cycle (before taxes). That’s an amount even those with a modest budget can handle.
Pretty exciting, eh?
I’m personally itching to buy some real estate. Partly because I’m not getting any younger, partly because I want a vacation home, and partly to build a family legacy. And let’s face it, real estate is also a real asset, and has the added advantage over gold that it can produce income. In other words, gold is not a substitute for real estate.
But for the near to medium term, the likely price trajectory for real estate is down and for precious metals, it’s up. So for now, I remain focused on accumulating more and more metal so I can capitalize on the ratio reversal when it happens.
And I like the advantages gold has over real estate. How many of these would be beneficial to you?
The fine print here is that you sell near gold and silver’s peak, and that you pay the tax on the gain from another source. Do those two things, though, and the home is free and clear.
There aren’t many investment certainties in life. But much lower ratios in gold and silver compared to real estate come pretty darn close.
Is a home or vacation property on your radar? 100 ounces of gold or 2,000 ounces of silver now, plus a little time, and you could very well get there.