Gold - Again, U.S. Housing

Gold - Again, U.S. Housing

Gold - Again

An article this morning titled '3 Ways to Profit as China Causes Gold Prices to Spike' discusses China as a potential serious buyer of gold, and suggests for that "it's a near-certainty to send the yellow metal skyward in the long run'.  I commented on this article as follows:

This article does not articulate the different risk profiles of the three suggested 'ways to participate' in gold, nor does it discuss physical gold itself as a fourth option or gold exploration company shares as a fifth option. Finally, it does not discuss the fundamental difference between physical gold (or arguably a gold ETF) as a safe-haven holding versus gold company shares and options as investing or trading assets.

As I see the risk profile of each in ascending order of risk (1) physical gold is the least risky of five alternatives, (2) followed by gold ETF's (which themselves are not in my view all of equal risk) which I see as slightly to potentially much more risky than holding physical gold depending on the terms of the 'trust agreements' that underlie them and the physical location of the gold they hold 'in trust', (3) followed by gold mining producer shares - all of which have different risk profiles from one another based on a large number of variables that more properly are the subject of books, not articles - and as I see it as a generalization are more risky than ETF's, (4) followed by gold mining exploration companies - that like producers all have different risk profiles - and as I see it as a generalization are more risky than gold producers, and (5) options, which provide the greatest leverage on the gold price, but in circumstances where that leverage can work both ways - which make them, as I see it, the most risky of all five alternatives noted in this comment.

In my view, Mr. Hutchinson's article is not one for the uninitiated who might read it, say 'wow', and jump into the gold market with both feet without having a detailed understanding of the comparative risks attached to the various ways one can participate both directly and indirectly in the gold market. Broadly, I believe the gold markets and gold investments to be complex places where one ought to tread carefully, ought to study and gain an ever increasing understanding of physical gold and gold mining fundamentals, and ought not to be susceptible to stress-related ulcers.

Two years ago I wrote an e-book titled 'Valuation of Mining Companies' that outlines what I see as the risks and issues that are necessarily considered when investing in mining companies (which of course includes gold mining companies). Anyone interested can find that e-book (no subscription required) by visiting www.stockresearchporta..., clicking on 'E-Learning' in the main navigation of the that website, and then clicking on 'Valuation of Mining Companies' found in the left navigation of the resulting webpage. If you do that, any feedback you give me on what you find will be greatly appreciated.

I add the following to my comment.  As I see it, each gold investment/trading vehicle other than physical gold ought not to be thought about in generalities.  Individual ETF, gold mining producer, gold mining explorer, or gold option has its own unique risk profile - and each must be researched, analyzed and assessed accordingly.

I suggest you:

·        read the article - reading time 5 minutes;

·        re-read my comment  and addendum to my comment on the article; and,

·        then think for yourself about what you have read and 'do your homework' if you participate or are contemplating participating in the gold market.

The best book I have read on gold is 'The Goldwatcher - Demystifying Gold Investing' by John Katz and Frank Holmes, available on Amazon.  I consider the first half of the book, which deals with physical gold, to be a particularly useful read.  

U.S. Housing

An article Monday titled 'U.S. Housing is 10% Below Fundamental: Could Drop 10% More' suggests that if relaxing what apparently in at least some instances the imposition of a 'Loan to Value' ratio of 70% for U.S. housing loans.  I commented on that article as follows:

I re-read the following paragraph several times: "So now's the time to write 90%...100%...110% LTV mortgages; and if the morons who wrote those sorts of mortgages three and four years ago, can't see that, then it's time to pull the plug on them, because they are no use to anyone". At first, I thought Mr. Butter meant to say 'So now's "not" the time ...', but as I re-read the article I concluded he might actually think "now is the time". That is a 'postponement strategy' if I ever heard one - and to me makes absolutely no sense.

Canadian Banks generally have adopted a 'Loan to Value' ratio of 70% for years - and have done that in a tax regime where interest on house mortgages is not deductible for income tax purposes. Much has been written of late about the stability of the Canadian Banking system through these current poor economic times.

Any 'point in time' pre-determined 'Loan to Value' ratio must reflect both perceived housing price stability, the mortgage interest rate, fixed mortgage rate time horizon, the terms of mortgage loan repayment, and the covenant of the borrower(s) in the risk assessment made by lenders at the time they make their loans. If anything, in a volatile and unpredictable housing market where mortgage interest is deductible, I suggest a 70% 'Loan to Value' ratio if anything is high in the context of U.S. long-term housing price and banking system stability.

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Ian R. Campbell

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