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Mailbag: Japanese Real Estate


I believe gold will one day be the single best investment on the planet...


Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.

Great questions. Let me address them, but first let me make one thing very very clear. You will not find a bigger gold bull than me. I believe gold will one day be the single best investment on the planet (as long as you can keep your government's hands off it, which I assure you will be a non-trivial task). It's just a matter of timing where I differ with, say Laurie McGuirk.

Japan provides a great analog on many fronts relative to real estate prices, gold, equity premia, etc. in a deflationary credit contraction.

Q: During the real estate deflation in Japan didn't the yen get smoked also?

A: Yes the yen declined in value - certainly against the dollar. The Yen in dollar terms declined 27% from 1990 to 2003 (the low so far in Japanese equity prices (and the Yen was down 50% from 1990 to 1995's low which correlated precisely with gold in yen terms - see below). The yen declined in terms of the German mark and the Swiss Franc equally: -31% and -25% respectively. So yes, it is safe to say that Japan's deflationary credit bust (and the resulting collapse in equity premia and real estate valuations) resulted in a meaningfully lower value for their currency relative to foreign money.

Q: Didn't gold priced in yen rise greatly in price?

A: From the peak of Japanese equity prices in 1990 (real estate prices peaked in 91/92 by most estimates), Gold priced in Yen DECLINED 32% from 1990 to the low in equity and real estate prices in 2003 (and was down 49% at Gold's Yen-priced trough in 1995 - almost exactly the amount the Yen was down in dollar terms). So no, despite a massive increase in Yen printing (50% increase in Japan's broad monetary aggregate from 1990 to 2000), Yen-based Gold did not increase in value as one would "expect". And this mimics the experience of us here in the states: US M3 has increased 394% since 1980. Gold in DOLLAR terms is down 35.5% over that span of time (in relative terms the decline in purchasing power wealth is even more dramatic). So no, Gold for Japanese citizens or Americans is no hedge against monetary inflation. If Bernanke becomes the new Fed Chairman and he keeps his promise to drop money from helicopters, that is in NO WAY a guarantee that Gold in dollar terms is going to protect you from a loss of purchasing power.

Q: Your complexity theory, which is projecting a sell off in gold and almost all assets, is it based mostly on wave counts? What is the most heavily weighted variable in its calculation?

A: No. Fractal pattern analysis is just a part - an admittedly important part - of the conclusion but manifestly not all of it (not even a majority of the reason). Of course, we cannot provide the specifics of the model but do know that it is a conclusion we derive from many variables and that we do not take lightly.

Q: Your theory is projecting lower yields higher dollar and lower asset prices. What will eventually break that cycle and start the inflationary wave that will then be the time to own gold and other commodities?

A: You and I will. And everyone else who participates in the economy. To the degree that we collectively become more risk averting (decreasing time preferences) or more risk-seeking (increasing time preferences) will determine when this current deflationary cycle (in place now for many years) ends and when the inflationary (nee hyperinflationary) cycle begins. The Kondratieff cycle is a good place to start to understand this risk-seeking, risk-averting cycle. My sense of timing? 2010-2011 for a bottom of this deflationary cycle.

Hope that helps.


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