Why Gold is Making Record Highs

The Link Between 0% Interest Rates, Spiking Gold

When "risk-free" cash keeps paying a guaranteed loss, then a growing number of people will, in due course, start seeking shelter elsewhere.

--"What The Economist Doesn't Know About Gold"; Seeking Alpha (6/29/2010)

The above quote is from the best piece I've seen yet explaining why gold is setting record highs.

The executive summary?

When cash can be deployed profitably -- think, bonds, CD's, stocks, anything -- the opportunity cost of holding gold is high.

However, when holding cash yields .0001% -- thanks, Federal Reserve -- the opportunity cost of holding gold disappears.

In fact, after taking account of inflation, the cost of holding cash is actually negative (and has been, for much of the last decade).

Make it painful to hold cash . . . and people won't.

Gold has emerged as the alternative for an increasing number of savers (not to mention various Central Banks).

P.S.: the best definition of opportunity cost I know is an anecdote about Cornelius Vanderbilt and real estate investing.

In the early 19th century, Vanderbilt bought a plot of land on Wall Street for $4,000, then re-sold it two years later for $8,000. His perplexed Buyer asked him (after the closing) why he sold a piece of land sure to continue appreciating.

Vanderbilt replied that, in another two years, the Wall Street land was likely to be worth $16,000.

Meanwhile, the 100 lots that he had just purchased in Greenwich Village (north of Wall Street, and then raw land) with his Wall Street proceeds for $80 apiece were then likely to be worth $80,000.

And he was right!

Divining Sellers' Motivation

Home for Sale -- Batteries (& Owner) Not Included

Prospective home Buyers seem to attach a lot of significance to Sellers' motivation (financial distress? Job transfer? Divorce? etc.).

Realtors, not so much.

For one thing, the three pieces of information a good Realtor is never going to tell you -- at least not without authorization -- are the Seller's price (bottom line, not asking), terms, and motivation.

For another, if a home is on the market . . it's for sale.

Period. End of story.

Realtors know that what ultimately matters isn't the Seller's mindset or circumstances, but the home's location, price and condition -- all of which stand on their own.

Put it this way: I've seen chandeliers and flat-screen TV's come included with a home . . . but never the previous owner.

As far as financial motivation goes, the local MLS now has fields asking whether the home is bank-owned, in foreclosure, or a potential short sale. A field left blank invariably means . . . it is.

What is Relevant

So when is speculating about the Seller (motivation, identity, etc.) relevant?

I can think of two situations, one common and the other rare (at least in the Twin Cities).

One. Notorious Homes (or Sellers).

At one extreme, homes linked to famous people can command a premium. Mount Vernon, George Washington's estate, isn't for sale (it's now government property), but you can bet that if it were, it would command a hefty premium.

Ditto for celebrity homes in Manhattan and LA -- assuming, at least, that the celebrity is known for good taste (Madonna's garish LA home sold at a steep discount years ago).

By national standards, at least, the Twin Cities doesn't have many celebrities. Ergo, you don't see that come up much here.

At the other extreme, homes that are supposedly haunted or were the site of a violent crime (murder, suicide) can be tougher to sell.

In Minnesota, disclosure laws keep changing on this, but the general rule is that if a typical Buyer would find something relevant . . the Seller has an obligation to tell them.

Two. Thankfully, the other relevant attribute about a home's status is much more straightforward: is it vacant or occupied?

Homes combine a benefit -- shelter -- and a cost (mortgage payments, taxes, upkeep, etc.)

Take away occupancy, and all the home represents is a cost.

Even if the home is an estate sale and long paid-off, there are still property taxes and upkeep.

There's also something called "opportunity cost": what the owner(s) could otherwise be doing with the money if it weren't tied up in the vacant home.

So, yeah, I think it's reasonable to assume that owners of vacant homes hear a little bit louder "ticking clock" than other owners.

Everything else being equal, such homes logically should sell faster, for better prices.

P.S.: But not always. I've seen plenty of estate sale situations where none of the beneficiaries seem to especially need the money (lucky them!), and are content to wait however long it takes to get "their price" (however they arrived at it).