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Are houses a better investment than gold? That is the question that came to mind for some of our readers after our article about the Dutch House prices in gold. Nick Bakker of IEX even wrote one column in which he substantiates his preference for real estate. According to him, real estate is a better investment because, in addition to a possible price increase, you also get a stable cash flow from rentals. Because of this stream of income, the fluctuations of the underlying asset are less decisive for the total return than with gold, which does not generate any cash flow.
Nick Bakker rightly notes that you should also include the income from rental if you want to compare the return on real estate and gold. We then made a calculation, which shows that you have to achieve a net return of 8% per year on a real estate investment to achieve the same return as gold. Note: This is if you take the period from 1969 to 2016 as a starting point.
If you take a different starting point, a different percentage will logically come out. For example, Nick Bakker shows that the comparison between gold and house prices is less favorable for the precious metal if you take the year 1985 as a starting point. This confirms that the moment you step into an investment can be very decisive for your returns.
It is clear from Nick Bakker's column that he sees gold as an investment, the value of which is impossible to predict in five, ten, twenty or fifty years' time. Combined with the fact that the precious metal does not generate any income, you could conclude that it is even a speculative investment. But is gold really an investment?
The idea behind investing is that you make a certain investment, in the hope that it will generate a positive return in the future. This applies to shares, bonds and also to real estate. Gold is more difficult to classify as an investment, because the precious metal has no counterparty risk and because nothing actually does. The only certainty you have is that at the end of the ride, you will still have that same piece of gold in your hands. The quality and weight remain exactly the same and - unlike many other investments - you have no counterparty risk. These two properties make gold ideally suited for storing wealth.
If you make the distinction between saving and investing, I would rather place gold in the first group. Why? Because most of the gold in the world is in the hands of people and institutions who see it as a piece of wealth. Central banks, which own about 20% of all the world's gold, do not aim to make returns. For central banks, the gold supply is only a solid collateral, which gives confidence to the currency and which can be used in a currency crisis to start a new money system and make international payments.
If we look at all the private gold holdings in the world, it is good to realize that this consists for the most part of gold jewelry. According to figures from the World Gold Council In fact, 50 to 60 percent of the annual demand for gold consists of jewelry. And they are not bought to profit from a rise in the price of gold.
People who Gold Coins And gold bars don't always do so with the aim of making a return. There are also many savers who are looking for an alternative to their savings because they are concerned about the stability of banks and the value of the money. Instinctively, they choose gold, because the precious metal has managed to retain value through all the wars and financial crises.
Of all the tangible assets in the world, gold is the most liquid. The precious metal is spread all over the world, has a universal quality and can therefore be traded worldwide at a price that is known to everyone. This makes gold very easy to trade worldwide, because there is always someone around the world who wants to buy it from you at any time. In that respect, gold is actually just as liquid as currency.
If you compare gold with real estate, the difference is immediately apparent. Real estate is much less liquid, because as a rule you can't sell it overnight. Also, real estate is tied to a certain location, while you can take gold bars with you wherever you go. This makes gold a completely different form of wealth that cannot be compared one-to-one with real estate or other tangible possessions such as art, classic cars or jewelry.
An important property that makes gold unique is its exceptionally high Stock to Flow Ratio. This is simply the ratio of the above-ground gold reserves to the annual production of gold mines. That ratio is not as high for any commodity as it is for gold, which means that the world's total supply is fairly constant and increasing at a fairly predictable rate. This ensures that people have confidence in gold as a means of storing wealth. Unlike the amount of money, there is no one in the world who can manipulate the amount of gold.
We are already seeing central banks reduce dollar reserves and expand their gold reserves. Central banks may be anticipating a new monetary system, in which gold reserves will become much more important than currency reserves. This is speculation, of course, but the fact that interest rates are falling to zero worldwide and that central banks are buying tens of billions of dollars worth of bonds every month already indicates that this money system is on its last legs.
Stock to flow ratio of gold (Source: Incrementum)
We may have strayed a bit from the question of whether gold is a better investment than real estate. But it's important to put both in a broader context. The big advantage of real estate is that it provides cash flow, but the disadvantage is that it is less liquid. Also, you have to invest time and energy to maintain and rent it out. Gold, on the other hand, is maintenance-free and has no counterparty risk.
It just depends on what your financial position is and what best suits your situation. If you have capital and it is convenient for you to invest it in real estate, it can certainly be interesting for the long term. But if you have savings and are looking for a tangible asset that you don't have to worry about, then physical gold is a very interesting alternative. Especially in an era of extremely low interest rates, which makes the miracle of compounding interest is no longer as much of a miracle as it once was...
