Methods to estimate the value of gold
The Economist Magazine’s Buttonwood column had an excellent article on May 9, 2011 which helped to understand how to value gold by comparing the cost of housing to gold. The commodity is hard to value because has no cash flow. Assuming U.S. homes are in need of a 10 to 20% drop before reaching equilibrium then one could start to calculate what is a fair value for gold. The implication is that gold is worth about $700. I wrote in “Deflation strikes marketplace” that gold is probably worth $1,000.
Methods to understand the difference
The article was concerned about why UK real estate had not gone down as much as the U.S. market and sought to explain the difference between the two markets. Regarding the divide between the two countries’ real estate markets I think the UK housing market is dominated by the London urban area which contrasts with America where the vast majority live away from densely populated coastal high income cities. If you look at California coastal cities, Manhattan and Washington the prices are still high, land is scarce and these areas seem more like the U.K. than the rest of the U.S. Another idea: the UK’s reputation as a safe haven for wealthy foreigners – by contrast U.S. tax law scares away wealthy foreigners.
The problem with quantitative analysis of the U.S. housing market is that the use of Easy Qualifier stated income loans from 1984-2008 warped the ability of economists to measure who could qualify for a loan, thus old paradigms from that era about affordability ratios are not applicable. I mentioned this in “Housing not comparable to the past”.
I think in the U.K. there was a lot less use and abuse of so-called “self-certified” or “Easy Qualifier” loans than in the U.S. In America many states allow foreclosure with no court judgment against the borrower; further many banks waive their right to sue the borrower for damages when they deem it impractical.
Investors should seek independent financial advice.