# Hyperinflation and Property Investment



## milic (8 Mar 2009)

I know that gold and commodoties are typically cited as vehicles to protect against hyperinflation. Does investment in carefully selected residential property serve the same function?


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## george.shaw (8 Mar 2009)

Providing you are near certain of getting the rent - settled families with secure jobs not likely to move - nurses, gardai, teachers. etc would be essential or you have a secure steady income yourself.

The report below is very good re hyperinflation. 

Is overly bearish even for me but best to consider all scenarios.

Think this is possible in US but less likely in the EU and with the Euro.

Best to hope for the best but be prepared for a less benign scenario.


Hyperinflation Special Report

Excerpt: Real estate also would provide a basic hedge, but it lacks the portability and liquidity of gold. 
http://www.shadowstats.com/article/hyperinflation


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## milic (8 Mar 2009)

Thanks George. Very interesting


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## Damian85 (8 Mar 2009)

Real estate has some elements which can prove an effective hedge against rampant inflation.

One would be using a debt to fund the purchase of your investment property. If you can lock in a fixed rate for a long period, and if inflation is high, a lot of your debt will be effectively paid off by inflation.

Also, it is likely that if inflation is high, rental incomes should rise in correlation to the inflationary rise. Also in inflationary environments, people may choose to rent, instead of buying their home, as interest rates would be higher. This could price a lot of people aiming to buy a house out of the market, hence improving the strength of the rental market.


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## roro123 (9 Mar 2009)

The gold argument for staving off inflation is a bit flawed in my opinion. Its akin to locking yourself in a storm shelter and feeling safe and unaffected buy the said storm. But there comes the time to emerge from the shelter back into the relevant currency from which you have come out of to get into the gold in the first place. Perhaps €'s were used to buy gold priced in $'s. This introduces an exchange rate risk, as you will inevitably be moving back into your base € currency to trade your everyday necessities. But firstly you'll have to speculate that the $/€ rate is not going to be much different than when you got into gold in the first place. If the currency is exposed to hyperinflation , does it not follow that when it comes time to realise your gold back to cash, that cash may have less buying power anyways. It does not necessarily equate that the price of gold will have continued to rise along with the inflationary effects on the underlying currencies.
 Gold hit a spike in 1980 at somewhere around $850 an ounce. If you adjust for inflation to 2009 it should be somewhere in the region of $2178 an ounce. That $850 price was achived in a global crisis ( Soviet Invasion of Afganistan & Iran/Iraq war ). It dropped back fairly quickly once it was realised that the end of the world wasn't nigh. We are already well into a global crisis and the current gold price is $938 an ounce. If thats calculated adjusted back to 1980 then that would be a price of $316.23 same as it was in 2000. Therefore if you put your $316 in in 1980 which could buy a lot( average car price in US was $7,574) and sold in 2000 (average car price in US was $20,355) . You would need a lot more of you gold to make up the inflationary gap in 2000. Factor in the exchange rate ( Euro didn't exist , but lets use Sterling) which the high in 1980 for $/£ was 1 pound to $2.44. $316 = £129. at the end of 2000 the rate was 1 pound to $1.44. $316 = £219. 
 Today $316 will fetch you £222.
 Todays gold price $938 will fetch you £661. However I believe this an already top heavy speculative bubble that may go on a bit but ultimately fall back once it is realised that the end of the world isn't nigh. You might make a few bob in the short to medium term, but as a long term safe bet to stave off inflation, I think it will fall back much like what occured in 1980 - 1985 period. Meanwhile all the FED money will have worked its way through and prices will have inflated whilst the Gold prices silently drop off.

 The whole US/Global approach of injecting trillions into the system is being done on purpose so as to cause rapid inflation, which will make a risky lent €350,000 mortgage debt look like a medimu sized personal loan in 5 years time. The Global problem is a debt problem, and whats the best way to deal with this?..Manufactured Inflation. Yes investments and cash will suffer as this inflation will erode wealth and gains, but the re-adjustment of the debt values will bring us back to a point where it can all start again.
So as the what OP alluded to , I think that property will recover quite quickly and that inflation and the subsequent wage hikes demanded will allow banks to easily lend 2-3 times these inflated salaries to purchase a property of similar values to the near height of the previous boom (rather than the 6-7 times salary madness). It may take 3-5 years to be back at the level, bearing in mind that pent up demand will ease into the market in all but the most "middle of nowhere" housing estates. There is no new supply worth talking about coming into the Irish housing market at this point, but people are people and most will ultimately settle down to have families and need housing.
 To the ordinary consumer gold is useless(jewelry & microchips aside), you can't live in Gold and Tescos don't accept it yet for your weekly shop, however housing is always useful, even when its overpriced or undervalued.


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## george.shaw (9 Mar 2009)

Errr . . .   there are some serious misapprehensions here.

Similar assertions were made on and rebutted this thread http://www.askaboutmoney.com/showthread.php?t=100972&highlight=GOLD 

Gold is a universal currency (owned by central banks and traded off FX desks in investment banks internationally) and has been rising in all paper currencies in the world - including the US dollar which is the strongest currency in the world in recent months.
[broken link removed] 

Similar arguments were made a year ago and  UK investors who listened to such arguments have lost more than 40% as gold was up by more than 40% in sterling terms last year.

Chinese, Indian, English or Irish investors do not and should not focus solely on the US dollar price of gold - they pay in local currency and thus should focus on the investment in local currency terms.

Gold is not "priced in dollars" as many uninformed observers continually say. 
It is just that the COMEX spot and futures price is in US dollars and this is the most commonly quoted price in the world as seen in newspapers every day. But bullion dealers in the UK, Germany, Switzerland and internationally quote gold in local currencies and get paid in local currencies.

To the "ordinary consumer" gold may be "useless" but to large investors, hedge funds and central banks it is increasingly important in order to hedge against debasement of paper currencies through a use of the printing presses internationally on an unprecedented scale.

The FT, Wall Street Journal and Bloomberg all reported this at the weekend:

China to Boost Commodity and Gold Imports to Build Stockpiles 
http://www.bloomberg.com/apps/news?pid=20601012&sid=ah9u8MmNxQGI&refer=commodities
China should invest its foreign exchange reserves in gold and copper, rather than in U.S. Treasuries to seek higher returns, Fu Jun, vice chairman of All-China Federation of Industry & Commerce, said at the congress today. 
“We don’t need to buy more Treasuries as the returns are low, whereas if China buy copper and gold, the annual returns could be as high as 10 percent,” Fu said. 

Hedge fund investors turn to gold
http://www.ft.com/cms/s/0/37fcba70-0c0a-11de-b87d-0000779fd2ac.html?nclick_check=1
 
Bearish Big Investors Catch Gold Bug
http://online.wsj.com/article/SB123655584569665995.html?
"Large investors, including some who anticipated troubles for the housing and financial sectors, have been buying gold, concerned that moves by governments to shovel money at problem areas could cripple leading currencies."

We are all subject to currency risk now - whether that be from the dollar, euro, or the pound and that is why a diversification into gold is important in these unprecedented times.


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## Damian85 (9 Mar 2009)

Getting back to the OC's question (why does nearly every post go back to the gold debate!! );

It is fair to assert that rental income can rise with inflation as the demand for housing (on a global scale anyway) will always be there. People always need shelter, and the global population is growing all the time.

Jason Hartman has interesting views on property and inflation. Worth checking out - www.jasonhartman.com


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## smiley (9 Mar 2009)

Buffett on cnbc today: A question on gold.


I want to get to a question that came from an investment club of seventh and eighth graders who invest $1 million in fake money every year.  This is the Grizzell Middle School Investment Club in Dublin, Ohio, and the question is, where do you think gold will be in five years and should that be a part of value investing?

BUFFETT: I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you.  Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot--and it's a lot--it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.


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## milic (9 Mar 2009)

So it seems that, whilst there are conflicting views on gold as useful in protecting against hyperinflation, there is general agreement that property can have an important role to play in providing protection. Is this a fair summation?


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## Damian85 (9 Mar 2009)

To me it is. And using fixed rate debt to fund this property, you can benefit from the effects of inflation. This is assuming that you are relying on rental income and not buying properties for speculative purposes and looking to 'flip' them


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## smiley (10 Mar 2009)

Damian85 said:


> To me it is. And using fixed rate debt to fund this property, you can benefit from the effects of inflation. This is assuming that you are relying on rental income and not buying properties for speculative purposes and looking to 'flip' them




Couldnt agree more. To me it makes a lot of sense. Inflation is going to be a BIG problem.

Dare i say it but now is the time to pick up a property bargain or to be seriously planning your strategy/have your homework done.

I am seriously looking into it. I avoided the speculative bubble we just had. There are serious bargains appearing and you have the power to bargain these guys down.

The time to buy do is before the inflation sets in....my gut feeling is within the next 6-12 months.

I am talking very long term investing here.


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## Damian85 (10 Mar 2009)

Property can protect you in different ways to gold. Unlike gold, you can use someone else's money (the bank) to purchase the majority of the investment. Also unlike gold, property can be an income producing investment. You are not speculating on appreciation.

The key challenge (extremely difficult at the moment?) is to locking in low, fixed rate, long term debt on property in a non-bubble market.

The debt gets reduced in two ways. High inflation can pay off your debt, while the rent income passively pays off you debt.


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## george.shaw (10 Mar 2009)

Property can be income producing and can be income losing if cannot get tenants in a massive recession of depression and unemployment at 15%+.

Commercial property likely to be highly problematic but residential may be good. Location, location and location will be key and getting good tenants. Security will also be key and quality gated communities and communities/ areas with less crime will be sought after.

Central banks own gold passively for the long term and they are not "speculating" on appreciation.

It is not an "either or", "black or white" simplistic solution - "property good, gold bad" or vice versa. Both are essential and have different characteristics and are actually very complimentary.

Howard Ruff is an acknowledged expert on stagflation and hyperinflation and he favours gold, silver, real estate and hard tangible assets.

Can read his book free online here. Don't agree with all in it but is very good and thought provoking:

Safely Prosperous Or Really Rich: Choosing Your Personal Financial ... - Google Books Result
by *Howard* *Ruff* - 2004 - Business & Economics - 288 pages
Real estate is another obvious choice — all kinds of *real estate*, even though in normal times it varies a lot by locality or region. *...*
*http://books.google.ie/books?id=O_l...X&oi=book_result&resnum=1&ct=result#PPA202,M1*


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## cancan (10 Mar 2009)

$897 george......

Ah safe havens.....

Thats a dollar for every link you posted to date hawking gold to date.

We get your gold stance.

No need to turn every thread into a gold thread. The broken record has been heard by everyone at this point.

You like gold - good for you - now lets move along....


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## george.shaw (10 Mar 2009)

LOL Cancan!

Gold could fall to $800 or $850/oz and likely still in bull market.

Besides, dollar price is irrelevant to me as I earn my income in euros and have bought in gold and property in euros through my pension.

Thus, like all pension holders I am up 40%  from day one and Euro gold is up significantly since I bought and is up more than 10% since the start of the year - unlike property, equities and nearly every other asset class.

Unfortunately, the Euro is set to come under serious pressure due to European banks massive exposure to the Eastern Europe property meltdown. Even the very pro Euro Guardian is warning:
http://www.guardian.co.uk/business/2009/mar/08/currencies-credit-crunch

[broken link removed]

Never hawked anything - simply advocated prudent diversification and passionately believe gold should be part of that.

Unlike you I do not feel the need to continually and inaccurately bash one asset class.

Diversify.


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## smiley (10 Mar 2009)

its getting a tad Irish at this stage george....

what rate of comission are you on?


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## cancan (10 Mar 2009)

Balance george.

People reading might get the wrong impression.

You would be up three times that with a reverse triple etf on the market.

Just because you are up does not mean you know what you are doing, as plenty of people realised recently.

At what point are you going to realise your gain btw - what's the exit strategy?

You do realise the currency you are buying in is being eroded away, so while you think you are up one amount, the underlying currency trade has you down in another.

Just by converting your euros to dollars in the last year, you could have realised the same gain, without the crazy fees, and shady dealers.


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## george.shaw (10 Mar 2009)

Silly Billies !

Can't handle the truth and the facts presented.

A real case of attacking the man and not the ball here lads.

See a recent quote by you Smiley:
"yes, it means he is still holding the shares....as far as i understand it.

He wont reveal which companies....he had to write the values down due to the dilution from the government guarantee.

It is a VERY positive development. VERY positive.

If the most successful investor in the world bought shares in our banks (and hasnt flogged them) it is fantastic news. "

What commission are you on from Irish stockbrokers or banks to peddle Irish bank shares? Not the safest investments in the world now Smiley especially as they look set to be nationalised.

Ok for you and others to be positive on equities, Irish equities and Irish bank shares.

Not ok for me to advocate diversifying into gold.

Hmmm . . .   bit unfair that. 

Lets try and keep on the topic that the person who started the thread asked and not engage in personal attacks.

Really is incredible that we have the biggest financial and economic crisis the world has seen (possibly ever) and you lads can't bring yourselves to say that yes possibly gold might be worthwhile having a small allocation in.

No wonder many people in this country have lost a fortune - even when confronted with the facts they still don't get it !


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## cancan (10 Mar 2009)

If your allocation of gold speak was relative to the allocation of it you recommend to hold in a portfolio, I think people would not have a problem.

But hijacking every thread with gold speak gets repetitive.

Your "facts" are just links you agree with. I could post 897 links saying the opposite if that would help.


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## george.shaw (10 Mar 2009)

Errr  . . .  I have not "hijacked" any thread Cancan.

Nor have I ever started a thread relating to gold.

I have merely reponded to other peoples comments and questions.

Would not have to comment so much if there were not so many inaccuracies and misconceptions re gold.

A little knowledge is a dangerous thing. 

Suggest you re read this thread and others and you will see that other contributors have frequently thanked me for my comments/ responses.

Enjoy your "reverse triple ETF"!?! with sugar on top and other leveraged speculations but not for me as are extremely high risk and belong in the casino.

Might as well just go and roll the dice.

Passive long term asset allocation is a slightly more conservative, sensible and prudent strategy in these most uncertain of financial and economic times.


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## Cayne (10 Mar 2009)

smiley said:


> its *getting a tad Irish* at this stage george....


 
Thats a despicable phrase coming from an Irish man.


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## cancan (10 Mar 2009)

george.shaw said:


> Would not have to comment so much if there were not so many inaccuracies and misconceptions re gold.
> 
> A little knowledge is a dangerous thing.


 
I agree - hence i think you should stop hawking the damn thing.
The only reason you are up is the euro lost a bucket of value against the dollar. Correct me if i am wrong, but every gold bug last year was predicting the demise of the dollar. That didn't happen as the predicted, so they keep pushing it's collapse out a bit.







That simple chart should illustrate very simply, the potential downside of what you propose.

You are jumping on a wave that is potentially very close to the shore.
Others should be aware of risk before you goad them into the water.


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## george.shaw (10 Mar 2009)

Lol !!

Jaysus - give my head peace you crystal ball gazing casino lover !
;-)

Important to always adjust for inflation Cancan:

*



*
*Gold Less than Half Its Inflation Adjusted High in 1980*
*http://www.economist.com/finance/displaystory.cfm?story_id=13185396*

Long term passive investors are aware of inflation's terrible evils but suppose you hotshot speculators who treat the world as a casino don't need to worry about inflation (pity the widows and orphans !!).

Gold is a hedge against weakness in all major currencies and is near record *nominal* highs against all currencies:
[broken link removed] 

I have some 20% of my portfolio in gold. If it does fall in euro/ dollar or sterling terms Cancan then I am very confident that the rest of my portfolio will be doing well.

That is the whole point of having financal insurance, non correlated assets and or a hedge in your portfolio and the whole point of diversification which you clearly do not understand.

Suggest you head to Cheltenham as probably have as much chance of making money there as you do in your short term leveraged speculations.
;-)


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## cancan (10 Mar 2009)

So I'm a "hot shot speculator" now?

I never once mentioned my positions in anything, so get off your high horse before you lecture me.

Invest away all you want, but don't keep banging on about it. Your opinion are well represented here already.

Time for a new record.


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## george.shaw (10 Mar 2009)

You can give it but cannot take it Cancan.

Really can't handle the cut and thrust of debate and dealing with the facts presented.

Why were you suggested a leveraged "reverse triple ETF"!?! previously?

Hope moderators can have a look and a word in your ear re having a rational debate , not getting personal and throwing the toys out of the pram because someone rationally points out the flaws in your argument. 

Haven't banged on about my investments but felt had to point out as I have had my character impugned with suggestions that my comments are motivated by profit or commissions.

What do you advise people and investors do in these uncertain times pray tell?

Give us some constructive pearls of wisdom rather than your broken record fundamentalist and simplistic guff - gold is bad, very bad, nay evil - beware of the gold!!
;-)


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## UptheDeise (10 Mar 2009)

george.shaw said:


> errr . . . I have not "hijacked" any thread cancan.
> 
> Nor have i ever started a thread relating to gold.
> 
> ...


 

+1


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## cancan (10 Mar 2009)

Here is a good pearl of wisdom.

Do the opposite of the general consensus on AAM.

2006 - Buy houses
2007 - Bank shares - they look good
2008 - Gold - $2000 - you can't go wrong! 

Short everything that is pushed here, and you can retire early.

I'll leave ye to it and go back to my cave.


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## Damian85 (10 Mar 2009)

Yeah, that's fantastic.

But what on earth has any of this argument got to do with hyperinflation and property investment?

The OC could have gone to other threads to continue these arguments about gold. Now, a potentially interesting, specialised thread has been clogged with meaningless noise, arguments, and personal niggling.


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## roro123 (10 Mar 2009)

Sorry George,

Gold is not a currency, if it was it central banks could create more out of thin air, it is a "finite" commodity, my views in relation to Gold is not that its a good investment or not but whether its a safe bet against the effects of inflation, which evidently it is not.

Theres only key times to invest in gold, and those times are in when there is a bubble caused by a crisis of confidence. However it should only be for the short term, because as soon as the crisis in confidence is over, the price drops off back to the normal levels if you factor in inflation. However the backdrop of the currencies that you buy the gold with and ultimately return to will end up devaluing. Its not a hedge against inflation, otherwise everybody would be buying gold all the time for the last 4 decades. 
Supply and Demand is fine, but demand is only really kicks in when theres some crisis going on, however with property , you may have occasional oversupply , but also pent up demand. I personally wouldn't buy property now, mainly because of the risks, although if I was in a position to purchase a property in a prime area for a reasonable price, I might be tempted, but only after considering quite a lot of benefits, such as rental consistency possibilities for my dividend and capital apprectiation possibilities  due to proximity to key amenities and services and infrastructure. 
Gold however being such "finite" commodity doesn't suffer from oversupply as much as lack of demand when things look more stable in other asset classes.
I think you should try to dispel the inflation hedging myth for all potential Gold investors if you are to be balanced about it. Gold may have periods of capital appreciation that can be exploited, but if as you say the supply is only increasing at 2% per annum, then there is proof in the pudding. Gold naturally devalues by 2% per annum.


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## george.shaw (11 Mar 2009)

I agree with Damian re staying on message but have to respond to Roro's misconceptions first as they are important in any debate re investing in hyperinflation.

Gold is an extremely finite currency and this is why it is a currency and a monetary asset and foreign exchange reserve. That is why central banks internationally including China's People Bank Of China are diversifying out of their huge $2 trillion dollar stockpile and into gold.

Gold is a very rare and finite commodity and a thus a currency (not a fiat paper currency) and this is why gold has not collapsed like every other commodity (and some currencies such as the Icelandic krona and to a lesser extent sterling) in recent months.

Central banks are rightly increasingly concerned about the prospects of financial, economic and systemic contagion. The German Bundesbank recently clearly stated how they view gold as an essential reserve currency and monetary asset. 

“National gold reserves have a confidence and stability-building function for the single currency in a monetary union,” the Bundesbank said. 
Suggest you read
[broken link removed] 

Property and gold are recognised as hedges against inflation and gold is more of a hedge against hyperinflation as pointed out by David McWilliams recently in The Irish Independent. 

The most classic example is Weimar Germany:

[broken link removed]

The last period of significant inflation to challenge the western world was in the 1970's and property and particularly gold did well in this period as per the inflation adjusted gold chart from the Economist below.

During this period of stagflation (inflation and low growth), gold rose by some 24 times or 2,400% from $35/oz to over $850/oz.







The 1980's and 1990's were periods of unprecedented economic growth and low inflation with globalisation and the emergence of the BRIC and other emerging markets.

The bottom line is that in hyperinflation as per Milic's question "investment in carefully selected residential property" may serve a similar function as gold.

In hyperinflation, deposits and savings (paper that can be printed and debased) are decimated and finite tangibles do well - precious metals, select properties (normally residential is safer) and shares of companies that deal in essentials - food, energy, water, utilities.

Diversification into tangible finite assets is key in hyperinflation whereas cash and gold is king in deflation as it was in the 1930's.

Diversify.


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## monkeysee (11 Mar 2009)

i like damians suggestion of buying a property and letting inflation eat the debt. so when can we expect all the dough that has been printed up to hit the real economy? how high will rates go? over what time period? what do people consider good locations to buy? can we really expect rents to go up in a high-inflation environment given the glut of rental properties on the market? i think house prices are going to continue to fall steeply over the next few years but if i thought i could stick the banksters with the tab i'd grab one. can anyone expand on this idea


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## george.shaw (11 Mar 2009)

Two good articles here and good website dedicated to "preparing Americans for hyperinflaton":

"Would you like a side of hyper-inflation with your job loss and reduced retirement?"
http://caps.fool.com/blogs/viewpost.aspx?bpid=150826&t=01006128892014518274

The World is Awashed with Dollars [broken link removed]

The National Inflation Association is an organization that is dedicated to preparing Americans for hyperinflation. 
[broken link removed]


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## z109 (11 Mar 2009)

george.shaw said:


> The last period of significant inflation to challenge the western world was in the 1970's and property and particularly gold did well in this period as per the inflation adjusted gold chart from the Economist below.
> 
> During this period of stagflation (inflation and low growth), gold rose by some 24 times or 2,400% from $35/oz to over $850/oz.
> 
> ...


This is simply not true. The early to mid 1980s were miserable everywhere. Property tracked inflation, no more. The UK had a property bubble in the late 1980s fuelled by over optimistic reductions in interest rates. Property prices collapsed in 1989 and didn't re-reach their peak until 1999 (inflation adjusted).  The Gulf War pushed the global economy back into recession in 1990-1991. It was not until the mid-nineties that economic growth pretty much everywhere gathered speed.

For US GDP growth see:
http://static.seekingalpha.com/uploads/2008/1/30/gdpannualized1_2.png
For inflation figures 1973-1984 see here:
http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=2
For US interest rates:
http://en.wikipedia.org/wiki/File:Federal_Funds_Rate_(effective).svg

And as for gold, it promptly lost 80% of its value as soon as peak inflation had passed.

If you bought 1,000 dollars of gold in 1980 @ 2,400 dollars/ounce, you would today have 417 dollars @ 1,000 dollars/ounce.
Put 1,000 dollars in cash in a Federal Funds tracker deposit account and you would have near 10k.

Gold is not a currency. Gold is a panic response to the threat of hyperinflation. Gold is like property. Which, of course, means that you are right to suggest gold as an alternative to property in the event of hyperinflation. Gold as an asset has favourable characteristics to property - it is relatively easy to dispose of, it can be broken into smaller chunks, it is portable, it can be hidden; none of these things are true of property.

But, you must be able to convert it to something. You can't eat it. You can't live in it. It is demand-priced. Demand can drop suddenly and that will result in the same price drops for gold that were seen in the 1980s. If it becomes evident that the central banks of the world (or even just those of the particular currency you happen to earn and have savings in) are going to raise interest rates in response to inflation, the demand for gold will wane.


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## Damian85 (11 Mar 2009)

Fair points yoganmahew, but I would consider good prudent rental property to be an excellent investment and inflation hedge.

I'm not talking about the Irish market here as it is still in a bubble, but there are many areas globally where a rental income stream can be steady and property reasonably valued.

If you can get a steady stream of income and a steady tenant stream, the appreciation potential of the property is irrelevant. 

If inflation strikes, interest rates rise, resulting in a stronger rental market.

Investment property can allow you to both protect yourself from inflation and attack inflation (by holding debt).


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## z109 (11 Mar 2009)

Damian85 said:


> Fair points yoganmahew, but I would consider good prudent rental property to be an excellent investment and inflation hedge.
> 
> I'm not talking about the Irish market here as it is still in a bubble, but there are many areas globally where a rental income stream can be steady and property reasonably valued.
> 
> ...


You are assuming purchasing with cash?

I would suggest TIPS (inflation-linked bonds) to be both more efficient and less hassle...


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## george.shaw (11 Mar 2009)

Some valid points, others extremely inaccurate, misleading and untrue Yogi.

I said "The 1980's and 1990's were periods of unprecedented economic growth and low inflation with globalisation and the emergence of the BRIC and other emerging markets."

This was a generalisation for purposes of brevity but besides the Wall Street Crash in 1987 and property slumps in early 1990's - the period was one of substantial economic growth, macroeconomic and geopolitical stability and corresponding rises in property and equity markets. The end of the Cold War helped matters and then the mid 1990's and the Clinton era really saw economic growth take off and this was sustained by Greenspans irresponsible cheap money policies in the late 1990's and 2000's.

Why do you and gold's detractors always conveniently pick the very top of the market - the very, very brief nominal high in January 1980 of $850/oz?

Lies, damn lies and statistics come to mind.

Gold was at this price for a matter of minutes on one day and only a tiny, tiny, tiny handful of investors internationally will have bought at this price.

The average price of gold in 1979 was less than $400/oz.
The average price of gold in 1980 was less than $650/oz.

Most would have bought closer to this average price.

The average price in the 1970's was less than $200/oz.
The average price in the 1980's was less than $500/oz.

The majority of investors will have bought closer to these average prices.

And if they had been adhering to portfolio theory and diversifying and not having all their eggs in any basket then they only would have had some 10% in gold and the rest in cash, bonds, equities and property.

By being diversified - 90% of their portfolio would have performed extremely well and their allocation to gold will have acted as a hedge against macroeconomic, systemic, inflation, hyperinflation, deflation and geopolitical risk.

And finally gold is a currency and to suggest otherwise is simply silly:
Gold: The only currency that can't be printed
http://moneycentral.msn.com/content/P113717.asp 

Gold is an extremely finite currency and this is why it is a currency and a monetary asset and foreign exchange reserve. That is why central banks internationally including China's People Bank Of China are diversifying out of their huge (China some $2 trillion alone) dollar stockpiles and into gold today.

Gold is a very rare and finite commodity and a that is precisely why it is a currency (not a fiat paper currency) and this is why gold has not collapsed like every other commodity (and some currencies such as the Icelandic krona and to a lesser extent sterling) in recent months.

Central banks are rightly increasingly concerned about the prospects of financial, economic and systemic contagion. The German Bundesbank recently clearly stated how they view gold as an essential reserve currency and monetary asset. 

“National gold reserves have a confidence and stability-building function for the single currency in a monetary union,” the Bundesbank said. 

Suggest you read
[broken link removed] 

Or even better the FT editorial:
Gold is the new global currency
[broken link removed]
[broken link removed]


DIVERSIFY


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## george.shaw (12 Mar 2009)

Good points re quality, highly selective property Damian.

And good point re TIPS Yogi.

Both could and should be in a properly diversified portfolio.

Issue with TIPs is that there are currently negative real interest rates, there is significant currency risk in the dollar  - not too mention the risk of default.

Best to stick with German inflation protected bonds or better again AAA rated short dated bond fund (with range of different AAA bonds) which reduces default risk and sovereign risk.


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## Marc (12 Mar 2009)

[/quote]


yoganmahew said:


> I would suggest TIPS (inflation-linked bonds) to be both more efficient and less hassle...




    This is an interesting line of thinking and I would have to agree that TIPS have some interesting characteristics but they are not without their risks.

1) Currency risk
If you buy Sterling Index linked bonds or US$ TIPS as a € investor you are exposed to currency risk. 

Research shows that movements in currency can swamp the returns from fixed interest investments in an unhedged portfolio. 

2) Term risk
Inflation-linked bonds tend to of long duration and therefore behave more like long-term government bonds. These are therefore affected by changes in real interest rates. If real interest rates rise, as they would if inflation started to increase, you get crushed by the fall in the price of your bonds and the increase in the value of your capital from inflation index-linking might not offset this.

Therefore, although in theory Inflation-linked bonds offer some protection against inflation the pay-off for investors is more volatile than from an investment in short-term bonds.

On balance, therefore I would argue that a position in a short-government bond fund should be used in conjunction with a smaller allocation to inflation -linked bonds as this should offer a better hedge over the long term.

see my post here:

http://www.askaboutmoney.com/showthread.php?t=107356


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## z109 (12 Mar 2009)

Sorry all, I was using TIPS as short-hand, as mentioned above, currency risk would preclude me from buying in other than euro at the moment, so French, German or Italian inflation-linked bonds would be my inflation hedge.

Thanks for the info Marc, will have a look.


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## george.shaw (12 Mar 2009)

No problem Yogi.
;-)


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## Damian85 (12 Mar 2009)

Yoganmahew, I would agree with TIPS as an inflation hedge except for the following points - A lot of TIPS are tied to a CPI, and in an inflation environment it is possible that a government could understate the real inflation rate. The CPI is not a perfect tracker of inflation either. Therefore, you may not be getting a true hedge.

I mean buying property with debt. By holding other people's money (the banks!), you get to turn the downside risk of inflation to your advantage.


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## z109 (12 Mar 2009)

Damian85 said:


> I mean buying property with debt. By holding other people's money (the banks!), you get to turn the downside risk of inflation to your advantage.


In that case I would look for a yield on a long-term fixed interest rate, don't think that interest rates won't rise if inflation starts to. Make sure there is no CPI linkage in the mortgage (mortgages in Iceland, for example, are adjusted by CPI; while I've never heard of this anywhere else, it doesn't mean it won't happen in future!).


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## Damian85 (12 Mar 2009)

yoganmahew said:


> In that case I would look for a yield on a long-term fixed interest rate, don't think that interest rates won't rise if inflation starts to. Make sure there is no CPI linkage in the mortgage (mortgages in Iceland, for example, are adjusted by CPI; while I've never heard of this anywhere else, it doesn't mean it won't happen in future!).


 
Absolutely. Long term fixed low interest rate debt is essential to take advantage of inflation destroying debt. Remember, locking in now at a rate can keep you at that rate for 20 or 30 years. A lot can happen in that time frame!!


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## z109 (12 Mar 2009)

Damian85 said:


> Absolutely. Long term fixed low interest rate debt is essential to take advantage of inflation destroying debt. Remember, locking in now at a rate can keep you at that rate for 20 or 30 years. A lot can happen in that time frame!!


You are, of course, risking that we won't go Japanese where interest rates stay low for twenty years and rents stay static or decline over those twenty years...


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## roro123 (12 Mar 2009)

Thats it then,I've decided I'm building a Gold House and renting it out. Could double as a temple where people can congregate and pray during times of hyperinflation. Any topless model will tell you that assets devalue over time unless the deflationary (sic) effects are counteracted by artificial inflation to prop them up and make them look attractive to stakeholders!
And with that nugget (sic again) I'll bow out of this debate


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## george.shaw (20 Mar 2009)

Media Alert: Hyperinflation Is Big Risk for U.S. Economy in 2010 -
But That Could Be Good News for Investors, Says Forex Expert
http://www.msnbc.msn.com/id/29637046/


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