Precious Metals Versus Property as Investments

October 31, 2012 | By | Reply More

Both gold and property have had, by historical standards, huge rises and, in the case of property, falls in the last ten years. These, out of the ordinary, volatile price movements have obscured the underlying virtues of both investments vehicles.

Now is time to get back to the basics and summarise the differences between the two, precious metals versus property, that investors should bear in mind when considering a move into one or the other.

Precious Metals Easier To Trade

Never before have precious metals, specifically gold, silver and platinum been easier to trade without delay via bullion or Exchange Traded Funds (ETFs). You can buy or sell in dollars, euros , sterling or virtually any other currency instantly over the internet and get your proceeds in the bank often within twenty four hours.

Property, on the other hand takes time to find, negotiate, commit and finalise a transaction. During this extended time period events may alter the market in unanticipated ways that may adversly affect profit expectations.

In this context precious metals have a definite advantage particularly to the shorter term investor or in the event that unforeseen circumstances require quick cash in hand. The benefit of being able to take quick advantage or remedial action in the face of a substantial change in the markets is, of course, of paramount importance.

Property Generates an Income Stream

The major fundamental advantages that property has over precious metals as an investment vehicle is as a generator of income in the case of ‘buy to let’, warehousing, etc.

If property has been purchased as a personal residence it can provide an eventual capital gain (tax free in many jurisdictions) with no short term pressure to sell providing mortgage commitments are being met.

Property, in terms of development land, also often offers spectacular gains to shrewd and patient investors, it just takes a lot of finding.

Leveraging Property Purchases Has More Potential Profit Opportunities

Perhaps the most potentially profitable aspect of property is the ability to leverage purchases although if the market turns against you then the risk of loss factor is multiplied.

To illustrate, if a 10% deposit of $25,000 is required to purchase a property for $250,000 and the property is resold for $300,000, (a 20% increase) and before ignoring any loan repayments made, the profit would be 25%, that is $25,000.

If the property had to be sold for $200,000 (20% loss) within the period the loss would be 25%. If purchasing gold bullion at $1500 an oz for the same $25,000 where leverage is not an option, and the price then rose 20%, the holding would be now worth $30,000 but the profit would be only $5000 (80% lower) for the same capital outlay involved in the property transaction. Vice versa in the case of gold falling in price by the same amount.

The option market has now opened up opportunites to leverage the principle precious metal ETFs. Be warned that this is a highly speculative market even for the professionals.

Lack of Available Capital Favours Precious Metals

Further factors to weigh up in the case of property is the amount of money you can afford to tie up over an extended period, maintenance and deterioration costs, tax, insurance and possible rent defaults.

Gold, silver and platinum bullion will have storage charges based on the value of your holdings and dealing commissions to pay.

You can invest as little cash as you like. For example the minimum purchase of gold bullion via Bullion Vaults is only one oz., at current prices little more than $1700, and trades will be settled the next working day in dollars, euros or sterling. You even have a choice of countries where your gold can be deposited in secure vaults.

Nor do shares in precious metal ETFs such as iShares Silver Trust (NYSE-SLV) require a significant capital outlay. Today 100 shares in SLV would cost less than $3200.00.

Contracts for Call and Put options on the precious metal ETFs cost relatively little by comparison, but the risk of total loss by expiry is significant.
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Cost Averaging a Factor with Precious Metals

One other often overlooked factor in precious metal versus property as an investment is that those of limited means or enjoying a steady income but having little capital can play the precious metal markets long term via bullion or ETFs by investing a small amount regularly and thus enjoying the benefits of cost averaging. Clearly not an option in the property market.

Follow the Trend or Hunt For Property Bargains?

Today the economies of the Western powers are in a turmoil, property prices are all over the place. The long sighted will perceive many bargains in the market place that may eventually provide mega returns in the course of time. Meanwhile governments continue to print more and more fiat money not backed by any tangible assets, stoking the fires of inflation.

Holding gold and silver and to a lesser extent platinum, are historically the best hedge against inflation and preservers of wealth. Gold has risen year on year for eight years and many analysts believe that this bull trend will continue for a good while yet.

Follow the trend is possibly the oldest and wisest, certainly the most ultimately successful, of all the sayings surrounding the investment scene.

  • Precious metals are in a long term upward trending cycle.
  • Property prices at this time are either static or falling in most countries but there are pockets of profitable opportunity.

We believe that with substantial capital resources, careful observation and plenty of time, property today offers a lot of potential profit. We like it. In the immediate future precious metals appeal cannot be ignored, although frequently volatile and prey to government inspired manipulation and short term speculative manoeuvring we will not ignore the trend.

At present, precious metal prices seem to be on a solid and sustained floor, with gold around $1700 an oz. which is just about the level that we are thinking of further buying for the longer term.

Our Take

At the end of the day there is probably little to chose between property and precious metals over the long term. In the shorter time frame precious metals have the edge and so have our vote.

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Category: Investment Research

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