Client Outlook - Special Series, 1 of 3

"Over the past several years I have had the distinct pleasure to work with many great people. My client base contains countless individuals that have not only experienced great success buying & selling local real estate but also have success in diverse areas of finance, business and investment.

Three of these clients have graciously agreed to share their perspective on the current Real Estate market. Throughout the years, I have always found their insights extremely valuable and I hope that you do as well!"

Always look forward to your comments!

Gold & Real Estate
Contributed by Ralph B. - 20 years experience Gold Mining

For more than 6000 years gold and other precious metals have been money for various civilizations. These civilizations, who in complete isolation from one another, came to the same conclusion. That mainly gold and much later silver became the currency of choice. There are several reasons for this. To be a good currency it must be rare so a small amount can represent a considerable amount of wealth. Being rare protected it from being depreciated by large amounts entering circulation causing ones gold to be worth less - what we know as inflation. Despite this the powers that ruled always created currencies that were not 100 % gold. Hundreds of these Fiat (faith based) currencies have failed. The average life expectancy of a fiat currency was around 40 years. They always fail for the same reason.


The ruling power, due to wars or simply to try and create wealth out of thin air, issues ever increasing amounts of paper to meet their needs but without a limiting factor like gold backed currency. This always seems to spiral out of control until the currency is worthless. It is after all the amount of money in circulation that determines its worth. There are numerous examples this happening. One of the most notable was the Weimar republic which was set up with a fiat currency after World War 1. In order to make war reparations set out in the Treaty of Versailles the Germans had to print massive amounts of marks.


The price of a meal went up while people were eating it. Working people got paid twice a day so they could run out at noon and buy something because in the evening it would be worth considerably more. Everyone was finally a trillionaire but could buy a loaf of bread with it. But one thing did retain its value during this hyper inflation. An entire city block in Berlin could be purchased for ten ounces of gold. Finally a new currency had to be issued. A bank holiday was declared and a new currency the Reich mark was issued. It was backed by land because the German gold was a spoil of war and had disappeared a few years earlier.


We might think that this is a rare occurrence but this has happened dozens of times since. Most lately Zimbabwe whose treasury had around 200 us dollars as of a couple of weeks ago. Everyone in Zimbabwe has trillions in Zimbabwe paper but can’t buy anything with it. They have taken to trading with placer gold which is always been the competing currency to printed money. Our current financial system can be traced back to 1913. And the creation of the Federal Reserve which is a privately controlled central bank.


Canada has its own central bank as does England and any other western country has the same. Gold was fixed at just over 16 dollars an ounce and a dollar had the words pay the bearer on demand. If you gave any bank 16 dollars and a bit of change they would give you an ounce of gold in return. Remember this 16 dollar an ounce number. In 1913 it bought you a nice suit or food for a family for a month. World War 1 caused a lot of money printing mainly by the British who tried to fix their currency to the prewar fix. But due to the amount of money now in circulation this didn't work. England experienced a depression largely because of this.


Back in North America things were booming with fractional reserve banking and buying on margin driving the stock market bubble. Bubble is great until they pop and in the Fall of 1929 it collapsed. The very thing that the Federal Reserve was set up to prevent. One might argue that they even caused it by contracting the money supply. This quickly led to the depression. In 1933 in order to improve the American economy Roosevelt declared it illegal for Americans to own gold. He didn't want the Americans to have a viable competing currency for what was coming next. Less than 10000 dollar fines and 10 year imprisonment the Americans turned their gold in for the gold fix of the day. After the due date expired the gold was revalued at 35 dollar an ounce essentially devaluing the dollar and making American exports much cheaper. This is also an interesting time as the gold that the treasury had backed the m2 money supply 100 %. The Dow was at 35 dollars as well. If you had, but you were not allowed to own it, 150 ounces of gold then you could buy a nice house outright. The dollars lost the words "pay the bearer on demand". The depression dragged on despite Roosevelt's and the feds efforts. One could say only World War 2 ended the depression. Then came Breton woods in 1945. The western powers knew that the war was theirs to win. So before it was even over they went about designing a new financial system for the world. It was decided that they had 18000 tons of gold in reserve and they would back the USA dollar with that and the US dollar would in turn be the reserve currency for every other country in the world.


This all worked well for the usual 30 to 40 year life expectancy of a currency system. But in this case it was only 28 due to the cost of Vietnam, a large trade deficit between the USA and other countries occurred and they wanted the gold now instead of paper they were supposed to be happy with. Nixon closed the gold window for all countries as the USA approached 8000 tons of gold left. And at that instant all the currencies in the world became a fiat currency like Weimar or Zimbabwe. Gold rose until in 1980 it peaked at 800 which are what the Dow was, and silver rose to 50 dollars. The price of a median home in the USA was around 120 ounces of gold. An ounce of gold also bought a nice suit or a month’s worth of groceries for a family. And the USA could go on a 100% gold backed currency backing M2. Fast forward to today. If history were to repeat itself. Gold is at 1560 the Dow 14000 and in order for gold to back the M2 money supply 100% gold would have to rise to 15000 dollars an ounce. And a median priced home 120 ounces at 15000 sounds absurd. Don’t forget that the money supply has increased by around 400% since 2008.


The money isn’t out bidding up real-estate or a suit or groceries. It’s fuelling a bond bubble. And if that much money goes into real estate a 2 million median home isn’t out of the question. It sounds absurd but that is what the guy who bought a city block in Berlin for 10 ounces of gold thought too. 

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