Gold Sweet Gold

Gary’s Market Commentary

• Unemployment unexpectedly drop
• Commodity prices break led by Gold
• Dollar rallies
• What is the real value of a dollar
• Who has all the money and where will growth come from
• Results for November: new listings declining, inventory declining, closed sales declining, days on the market increasing.

The decline in unemployment to 10% was a complete surprise. It put the US$ in a turn around and gold and commodities in a sell of. Of course it was not unexpected as many analyst were calling for a halt in the decline in the US$ and a break in commodity prices especially that of gold. As we come to the end of the year, hedge funds, traders and investors will want to lock in their gains. Clear the decks take profits and lets take home our 20% of the profits, say the Hedge Fund Managers. It will be a big payday for the hedge fund industry. Of course, none of that will accrue to poor Mr., Mrs. and Miss America as they wonder: will they lose their home, keep their job or find a new one.

The rally in the US$ is good for our real estate market. As many wonder about the inventory of foreclosed homes and the potential for a commercial real estate bust; having buyers over seas with US$ to invest is a good omen.

As I stated in my past letters gold and commodities had nothing to do with supply and demand rather it had to do with the store of value. The US$ is basically a worthless security. It represents the “full faith and credit” of the United States of America. There is no Gold backing, no Silver backing; just paper that measures your labor. I recall the term a “fiat” currency from Economics in college. It is a transfer from your hard work and a measurement that allows you to buy something of hard value; like a home, a piece of jewelry, a car, commodities like gold and silver or a security that provides you a return of investment measured in income of equity growth, and goods and services.

Prior to August 15, 1971 the dollar was backed by gold or at least partially. The convertibility of US$ to Gold was in the hands of governments. Then on that date Richard M. Nixon ended the convertibility. The stock market ended its bull cycle in November 1972 and declined to a low and loss not seen since the Great Depression. Inflation soared, commodities soared, gold eventually stopped somewhere around $800 an oz.; but most importantly, real estate became a “store of value”. The foreign investors relied on their local government to convert the amassed US$ into gold put their faith in gold on the open market, commodities and U.S. Real Estate.

Many of you may not realize that the US$ was a gold backed currency for years. It was the Gold backing that helped move the U.S. out of the Great Depression. Yes, the U.S. Government spent billions to get us out and up and it was not until WWII that we really spent enough to get out. Did you know it was not inflationary? The spending from the time of FDR’s election until the end of WWII was financed with Gold at Fort Knox. All the dollars that were created and in circulation were Gold backed. Gold was $20.67 for years until FDR discovered that all he had to do is revalue Gold to $35 per oz. and our currency in circulation could expand by 69%! In fact FDR would joke after taking his breakfast and with cigarette and coffee decide whether to increase Gold another dollar or two.

So where are we today; and is it any different? Not really and yes it is different.

Not really is that the expansion of the US$ during the 60’s was from the Great Society of LBJ and the Viet Nam War. The expansion and deficit funding along with an imbalance in trade created another deficit, a trade deficit. Nations which began to accumulate US$ from their trade imbalance cashed the dollars in for Gold. There was not enough Gold in Fort Knox to cover the US$ in float, so Nixon ended the exchangeability. Too many dollars chasing too little goods resulted in inflation. The U.S. could have funded the Great Society and Viet Nam if there was a positive trade balance in favor of the United States! There was not a favorable balance and inflation was created when convertibility ended. What happened next was that “smart Money” realized that even hard assets, as in Gold and Silver, could become over priced and the next hard asset was Real Estate. What is the key to buying Real Estate? It is LOCATION, LOCATION, and LOCATION. Where is the safest most secure most equal place in the world to live? IT is the United States. So where is LOCATION, LOCATION, LOCATION located? It was then the United States. San Francisco, New York, Los Angeles, Honolulu took off, and then farmland took off as wheat, corn and soybean prices escalated.

What the politicians who created the imbalances missed back in the 60’s and 70’s was that the U.S. was no longer the cheapest and most competitive source of production in the world. The U.S. was losing the competitive edge. The Baby Boomers wanted it now and did not want Dad’s Cadillac, they wanted a BMW, a Mercedes, and Brooks Brothers was passé. The inheritance of the Baby Boom Generation from the Depression Generation’s frugality was spend, spend, “been there, seen that, got that”. A strong dollar and a change in spending attitude by cheap goods overseas was a part of the increasing imbalance of trade.

Today all the ills of the past are coming home. The imbalance of trade, deficit spending, lack of government regulation has created a weaker dollar. The crisis of September 2008, the failure of Lehman Brothers, the breaking of the “buck” by a Money Market Fund created a crisis of faith.

Looking back, where did the excess US$ go in the past and today? They went into Gold, commodities, and real estate. Who owns all those excess US$? China reportedly holds US$2.7 trillion. What backs the Yuan? It is the same thing that backed the U.S.$, competitive and cheap productivity and products. What was the first location the newly rich in China placed their bounty? Hong Kong was the first LOCATION. Today it is said that Hong Kong demands $US 1000 per square foot! Where will and where are those excess US$ looking now? The same place they went in the past, San Francisco, Los Angeles and New York City.

I believe that waiting to buy real estate will be a regret many look back on and regret their failure to act. The US$ you hold is worth only what it can buy. The yield on US Treasuries are lest than the historic inflation rate, the stock market is up over 60%, Gold is up over 50%. So where is the historic store of value that has not risen? You know the answer it is REAL ESTATE. The US Government is subsidizing the purchase of real estate; interest rates on mortgage have never been lower. Waiting will be your error.

The November report on Atherton, Menlo Park, Palo Alto, Portola Valley and Woodside show a decline in inventor, sales and new listings. Sooner or later you will see a “POP” in prices brought on by a “POP” in demand. We, Jim, Craig and I are waiting to help and negotiate for you now. Call us today and arrange a viewing and tour!