Gold and oil are very different in their investment characteristics since gold is purchased principally to hold as an inflation hedge and oil is purchased primarily for refinement into gasoline and other petroleum products. Typically, this makes oil much more subject to international political factors and global economic forces. However, Gold has taken a more prominent role over the last few years as it has become a de-facto ‘anchor’ currency that is value-constant against monetary fluctuations by central banks.
What to Expect in 2011 Monetary Policy
One of the primary monetary news items to note as 2010 draws to a close is the announcement of more ‘quantitative easing’ by the Federal Reserve1. In plain terms, this means that the Fed will purchase treasuries on the open market. This will have the effect of artificially increasing demand for treasuries, which will push down the rate of interest. It is also expected to have the effect of pushing more money out into the economy with the hopes that it will stimulate consumer demand. Unfortunately, many fear that it will also stimulate inflation.
Atlanta, GA – 25.2% Return on Investment in 2011
Atlanta represents an investment gem in the southeastern United States. It has spectacular economics from a development and employment perspective that make it a tremendous opportunity for income property investors. With a wide diversity of employers, many universities, and a vibrant cultural presence in the city, Atlanta has attracted a tremendous amount of in-migration from young professionals seeking employment opportunities. Since many of these young professionals choose to rent, the Atlanta market has very healthy rents relative to values. Currently, approximately 31% of listings in Atlanta are from foreclosures.
S&P 500 vs. Gold Price
One of the important ratios to keep in mind when examining the equity markets is the gold price relative to the major stock market indexes. This provides a valuable insight into the extent to which market values reflect a real shift of sentiment toward equity value, versus the extent to which the value has lost value, driving increases in nominal valuations to simply retain purchasing power. Over the last 35 years, the relative price of Gold1 and the S&P 5002 has oscillated up and down very significantly. In the aftermath of 2008 and the financial crisis, this ratio has regressed toward a value of 1.0, which indicates equal valuation for the S&P 500 index and an ounce of gold. In the latter half of 2010, the S&P 500 vs. Gold ratio dropped below 1.0 as Gold prices were pushed up by speculators seeking to hedge against expected future inflation. Our analysis indicates that this trend is likely to continue through 2011 as monetary expansion inflates both asset classes.
Interest Rates To Go Here in 2011
One of the principal economic leading indicators for 2011 will be the movement of 10-year treasury rates. The reason for this is because 30-year fixed rate mortgages are indexed against the 10-year treasury, and interest rate movements have a dramatic impact on the affordability of homes.
Denver, CO: 13.1% Return on Investment for 2011
The Denver area has been a historically stable real estate market for both owners and investors. Market values experienced a downward correction following the financial crisis of 2008, showed signs of stabilization as 2009 transpired, but that stabilization was short-lived, as the market experienced volatility moving out of 2009 and into 2010. Currently, approximately 35% of listings in Denver are foreclosures.
Money Mischief
By now, most people have heard about the second round of “Quantitative Easing” being conducted by the Federal Reserve. In short, this means that the Fed will be purchasing treasury bills with freshly printed money to inject more cash into the monetary system. To date, most of this additional liquidity has been limited to banks who have opted to hold the capital instead of loan it out. The reason for this is because the banks can borrow from the Fed at extremely low overnight interest rates and use the capital to purchase treasuries with a yield rate that exceeds their cost of borrowing.
Portland not Good for Income Property Investments Yet
Portland experienced a cyclical expansion of market values similar to many other areas, and saw a subsequent decline after the financial crisis of 2008. The market showed signs of stabilization in 2009, but has subsequently resumed a downward correction. Values in Portland are regressing toward a more linear growth trajectory. Currently, approximately 42% of listings in Portland are from foreclosures.
Great 19.4% ROI for Phoenix Income Property Investments
Market values in Phoenix are currently at approximately the same level as in the year 2000. The market area experienced a tremendous run-up during the real estate bubble and a spectacular during the financial crisis. During 2010, the regression back to fundamentals continued in Phoenix. For people who bought at the wrong time, this value contraction leverages out to a rather substantial loss. However, the current low interest rates allow buyers to generate cash flows that will help them to sustain the investment through value fluctuations until a path of growth is resumed.
The Future of Inflation
The general price level in 2010 relative to 2009 shows average price levels that are nearly flat. The reason for this trend is significant commodity price increases in 2007 and 2008 that collapsed after the global financial crisis. Much of the reason for the price volatility in commodities is leveraged buying and selling through hedge funds that drove prices up during the bubble and precipitated a price crash after the bubble collapsed as many entities were simultaneously deleveraging their positions. To demonstrate this phenomenon, we have graphed the Consumer Price Index for Urban residents (CPI-U), Producer Price Index for Finished Goods (PPI-FG) and Producer Price Index for All Commodities (PPI-AC) from 1995 up to the present time.