Gold and the Housing Market

Reprint from Renthusiast - May 10th 2006

This morning we read that gold has passed $700/ounce, just one month after reaching $600/ounce, and its value increasing more than 60% in the past year and over 250% in the last five years. How does this dramatic increase in gold value relate to the housing market? Actually, in relative terms, the "value" of gold remains constant, since gold supply hardly changes. Realistically, it is the value of the dollar that has decreased relative to gold, since the dollar supply changes constantly; as and when the Federal Reserve Bank decides whether or not to print more money. With regards to gold however, it has been argued that over 90% of all bullion ever mined is still in existence.
When analyzing from this perspective, we can appreciate a more direct link between the cost/value of gold and the global housing market. Since gold is priced and traded in dollars, and since dollars are the recognized international monetary standard, global property investors should not ignore the gold and precious metal market indicators and should pay as much attention to gold market movements as they do to interest rate changes and fiat currency trades.
A significant difference between property markets and other investment markets (such as gold, oil, bonds, stocks etc) is that property markets are extremely localized. For example take the current property boom and building frenzy in Dubai and compare that to what's happening in Zimbabwe No comparison. Yet both economies use dollars for their reserve currencies and both economies are directly and instantaneously affected by the current movement in gold.
Other aspects that affect housing markets are

1. tax laws
2. immigration and demographic trends
3. mortgage rates
4. interest rates
5. development/planning regulations
6. direct/indirect foreign investments

All of these factors tend to be extremely localized. Here in London for example, the above factors play themselves out in dramatically different ways in boroughs like Hackney versus boroughs like Westminster. On a national and even international scale, the differences are much more dramatic.
Yet, inspite of these differences, there is one major similarity. In all the varying markets, housing and real estate is purchased with money. And since, for better or worse, gold is money, we have to take a closer look at where the money is, anticipate where it's going to be and plan and invest accordingly. Much easier said than done. Good luck and God Speed !