Working Out Where To Invest

Written By Russell Tym, Authorised Representative of MoneyLink Financial Planning, AFSL No 247360

A couple of weeks ago I received a newsletter that assured me it was my passport to unlimited wealth. It recommended investing in gold related assets as the price will soon reach $US2,000 per ounce, and possibly even $US3,000. That’s a fair climb from the current $US635.

It said excessive oil prices caused gold to shoot up to a record high in 1973, specifically the Arab oil embargo. This caused economic growth to collapse during a period of high inflation. The prices of gold, oil, metals and commodities soared.

Gold rose from 35 times the price of silver to over 90 times. The newsletter says conditions are now very similar so gold is sure to rise to $US2,000-3,000 per ounce. I was about to order a load of bullion when I started to think about the claims.

Currently inflation is way below 1973 levels. If high oil prices slow economic growth, that will reduce demand for commodities and their prices would fall, not rise. And I couldn’t see the relevance of the silver price.

I was puzzling over this when another newsletter arrived. It said that the continuing rises in US interest rates will soon frighten away the commodity speculators and metal prices will fall sharply.

It said the tug-of-war between commodity markets and the US Federal Reserve is continuing, with the markets in the ascendancy at present. In June the Fed warned it would continue raising rates to slow commodity prices.

In July it lifted rates again, but implied in its accompanying statement that there may be a pause before any more increases. This was all the commodity markets needed to fan the speculative flames again.

The writer says the Fed will raise rates quickly twice more to choke the commodity speculators. This will also slow the US economy, reducing demand for commodities and causing a price collapse. In past cycles the fall from peak to trough has been 30 to 50 per cent so a similar crash is likely.

After reading the newsletters and being confused by these ‘experts’ I traveled to Perth. There I found the real solution to the question of where to invest.

A residential property boom is in full swing. Many locals think housing prices will continue to rise forever and getting rich is just a matter of borrowing and buying the biggest house you can as soon as possible.

Prices have doubled and tripled in the last few years. Properties that were $160,000 now sell for $400,000, those that were $400,000 are now over $1 million. It’s a topic of conversation at every gathering.

Developers are clearing vast tracts of land 50 kilometres from the CBD for more houses and investors are buying. I was about to put a deposit on a few blocks myself when a couple of experienced investors shocked me by predicting a slump may be due.

Visiting Queensland’s Sunshine Coast last week I found the housing boom has peaked there. Prices haven’t fallen, no-one wants to sell at a reduced price, but sales are slowing and every fourth house has a ‘For Sale’ sign. The higher home loan rates may soon force sellers to meet the market.

At an airport I picked up a book called “Get Rich Slow” by Clifton Thornton to read on the plane. It recommended investing in shares. It said stamp duty on investment property purchases is “at least 10 per cent”, about three times its actual average level.

It says BHP is 1,000 times its real size and includes many factual errors. It recommends buying exactly 1,000 shares in ten of the top twenty companies by size. That means putting about $75,000 into Rio Tinto and $3,800 into Telstra. That would make for a very unbalanced portfolio.

Speculative booms and published misinformation make choosing sensible, appropriate investments very difficult. Using thorough research, clear thinking and good advice is the best approach.

Disclaimer:

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