Gold News

Gold vs. the housing market

The Aussie Dollar might be rising, but Australians share just the same problems as America...

GOLD FOR DEC. delivery rose $11.70 after the US Fed broadcast its intent to sacrifice the Dollar on behalf of the housing market.

   We realized the significance this morning when we noted that the futures price – at $735 – is at 27-year high. That's longer than most of our co-workers have been alive.

   Spot Gold opened Wednesday at $723. And unlike oil, we don't expect the high gold price to lead to lower demand. Just the opposite.

   The more the Fed cuts interest rates, the higher Gold Prices will go. As our friend Porter Stansberry put it, "The Fed will cut, and it will continue to cut, because its mandate is to protect the banks (yes... I know... its legal mandate is officially "price stability," ha, ha, ha... I'm talking about its actual mandate, though).

   "Having made hundreds of billions in bad loans, the banks – once again – need to be bailed out. Like geese that feel the winter coming even when it's still warm outside," Porter continues, "wise investors have watched the credit bubble build and have flown to gold. Anyone with any sense has long since bought gold – as we've been preaching regularly since 2003. Soon, the kind of investors who like to chase performance (a short-lived, but sometimes influential group) will jump into gold, too. That's when you'll know it's time to take some off the table..."

   It's probably not time yet, though. Here in Australia, the gold sector was up nearly 2% yesterday. Major producers Newcrest (ASX:NCM), Sinogold (ASX:SGX) and Lihir (ASX:LGL) are all up smartly today. Smaller gold stocks will likely soon follow.

   In the big picture, you're already seeing Aussie Dollar strength, and a rising gold price in Aussie dollars too. Economically, however, the same fundamental problems that have laid America's economy low also afflict Australia's economy: debt, globalization, and dependence on rising housing prices. Though the resource story is bullish, the debt story is not.

   "Economist Steve Keen warned that mortgage obligations in Australia were set to reach crisis point in less than two years, while a study by JP Morgan found that about 600,000 households, or 8% of the market, were likely to experience at least mild mortgage stress by the end of this year," writes James McCullough in today's Courier Mail.

   It's not so much that the American subprime crisis will hit Aussie banks – although that appears to be a possibility in few cases. (These things are as never as isolated or "contained" as the authorities would like you to believe.) The real problem is that Australians have been using debt to live above their means.

   There are several explanations. Maybe it's because wages haven't kept up with inflation. Maybe it's inflation in expectations. With so many visible signs of wealth, the temptation to feel wealthy by surrounding yourself with new things (including a home) is strong, even if you can't afford them. All you have to do is reach into your back pocket and slap down some plastic. Maybe the entire financial system is rigged to put people in debt and keep them there, making the banks rich.

   Whichever explanation you prefer, there are certain realities that don't change.

   Homeownership, though a nice national goal, is always a highly individual choice. More importantly, it's a straight financial decision. It comes down to simple math: can you afford the mortgage payment?

   With rising house prices, many people have been seduced into the idea of getting rich quickly through property. But affordability has not really improved. It's gotten worse, in fact. Only the availability of easy credit has kept people in the game. But this isn't a game most people should want to play—not that we are in the business of telling people what they should want.

   Perhaps we should rephrase: accumulating debt to buy assets that fluctuate in market value is a sucker's game. Most people lose at it.

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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