7 Reasons Real Estate Is A Better Investment Than Gold: Rebuttal

Jason Hartman, Founder and CEO of Platinum Properties Investor Network and a “self made multi-millionaire,” recently did a “Creative Wealth Show” podcast on the 7 Reasons Real Estate Is A Better Investment Than Gold. The conversation relating to gold starts at the 4 minute mark and goes through minute 14.  For those without access to sound, you can read the 7 reasons article here (a snapshot of the article appears below).

From Hartman’s website;

Platinum Properties Investor Network, Inc. is a comprehensive solution providing real estate investors with education, research, resources and technology to deal with all areas of their income property investment needs.

While Hartman’s company does primarily sell Real Estate, it seems with the decline in real estate prices, they are putting more emphasis on their online profit center, focusing on selling theirs and others expertise on various strategies to make money.  These programs include 6 months of coaching for $4,997 to his “Creative Wealth Encyclopedia” selling for $697.

Creating wealth seems to be what Hartman’s company is about.  That’s fine and dandy, however, Hartman decided to step into an area he might not have the expertise or knowledge to criticize.  Hartman  says precious metals are “mediocre” and further states that “gold is not an investment.”

Where Hartman and I Agree

Hartman considers gold as money, “a store of wealth, savings.”  He correctly points out that gold is a better place to put your money rather than U.S. Dollars or YEN, because the latter are “fiat money,” backed by a promise (understand that he, nor I would recommend turning all your U.S. Dollars to precious metals).

Hartman says “money is not an investment, it is simply a store of wealth.”  This is true.  As we all know, the U.S. Dollar, or “Federal Reserve Note” (FRN) is used as money by over 70% of the world.  This is because of their perceived store of wealth.  FRN’s however have not been a store of wealth since their inception in 1913.  In fact, they used to be exchanged for gold or silver coin, but now can’t be exchanged for anything.

I don’t think Hartman and I are too far off in our understanding of what gold is so far, except for him calling it “mediocre” and a “bad investment.”

What Money Is

Money is a medium of exchange.  It has the characteristics of being durable, portable and accepted.  Gold has all these characteristics and has for 6,000 years.  The U.S. Dollar has 39 short years of existence without gold backing.

Hartman Says Gold Is Not an Investment But Then Says Gold Is A Bad Investment – Is Gold an Investment or Not?

So why then does Hartman call gold a “bad investment.”  I thought he just said gold wasn’t an investment at all.  I believe the following critique can clear up any confusion.

Critiquing Hartman’s 7 Reasons Is a Better Investment Than Gold and Gold Is a “Bad Investment” One Reason at a Time

1. In contrast to property investment, there is no financing, thus no leveraging to allow you to build wealth.

If one wanted to leverage their gold, they simply can go to one of the commodity firms and buy 4 to 6 times as much of the yellow metal as they could with just their cash on hand.  I don’t recommend this, but there are companies like Monex that specialize in this (This is not an endorsement of Monex).

From the Monex site: “Or, you may elect financing of your precious metals, using as little as a 20% down payment and taking advantage of investment leverage of as much as 5-to-1, through our exclusive Atlas Account program.”

The way people get burned by this, just as with real estate, is if the initial purchase is made and prices decline.  The investor finds themselves, as many are today who bought real estate in 2005 or later, upside down with their leveraged investment.

This has not occurred with gold in the past 10 years on a calendar year basis, but at times when there is a dip in the price of gold, like we saw in 2008, the buyer at the higher price can get burned.  That’s why Monex has a “F” rating by the BBB.  Many people do not understand what they’re getting in to and complain.  I imagine many people who bought real estate just before it’s top thought real estate could go up forever.  Naturally they are not too happy about the result of their timing.

2. In contrast to tax deferment opportunities, there is no tax advantage.

Unlike CD’s and Money Market’s, where the interest is taxed every year whether you use it or not, taxes on the growth of one’s precious metal holdings are deferred until the time they are sold.

3. In contrast to real estate rental, there is no income potential.

It is true there is no interest income received by the holder of precious metals.  But a hoard of gold and silver right now would make for nice collateral in purchasing real estate, more so than holding a debt burdened piece of property in a declining real estate environment.  Also, the precious metals can be easily liquidated.  Lastly, precious metals have no maintenance issues and never need a new roof or a fresh coat of paint, let alone a leaky faucet fixed.

4. Your investment is subject to confiscation; arguments that collectible coins are immune from seizure are flawed since there is no guarantee this protection won’t ever change.

Everything the government wants to confiscate, they can.  The Treasury has said so.  Even if one owned their home outright, they could lose it for not paying their property taxes, through eminent domain that continues today or even an unpaid dental bill.  Unfortunately there is no such thing as allodial title any longer where true ownership could be had.

Hartman is right though about the collectible coins issue which I discuss in detail in my book. Caution is advised.

5. Precious metals are prone to manipulation by those motivated to suppress their value in order to boost paper money.

There is a degree of accuracy here.  Gold is the enemy of the Federal Reserve as it represents truth.  It represents the the truth whereby the Federal Reserve creates money out of thin air, hands it to congress allowing them to spend it on wars, the welfare state, and anything else they deem necessary.  The last thing Congress wants is a depreciating dollar.  But real estate prices are also affected by Federal Reserve manipulation in the interest rate markets causing the bust in Real Estate we are currently experiencing.  Thomas Woods; PhD Columbia, explains it quite well in his book Meltdown.

Despite said manipulations in gold, it has gone up in price, year over year for 10 years straight.  Real Estate unfortunately has not.  This doesn’t mean that real estate at some point in the future won’t be attractive again.  Personally I see this in the distant future.

6. The myth of superior gold liquidity. This argument fails on a couple counts. Proponents tout the facility of buying and selling gold, but there are hidden costs in offers of guaranteed buy-back of gold purchases. When you are ready to liquidate your investment, you’ll be penalized with a 1.5% premium for melt-down value, on top of shipping & handling plus insurance expenses. Real estate actually benefits from its lack of liquidity because combined with higher transaction costs, this equates to lower volatility. In contrast, the low transaction costs and high liquidity claimed for precious metals are a perfect formula for greater volatility.

I’m not sure where Hartman pulled this one from.  Let’s start with this statement; “When you are ready to liquidate your investment, you’ll be penalized with a 1.5% premium for melt-down value, on top of shipping & handling plus insurance expenses.”

One does not “melt-down” American Eagle bullion coins, the preferred and most well known way of buying gold.  These coins are actual U.S. currency and it is illegal to do so.  Most gold bars may need to be assayed. Maybe this is what Hartman is referring to.  Personally, I don’t recommend taking possession of gold bars for this reason.

Shipping and handling can be eliminated by taking the coins to your local gold dealer to sell (I give recommendations on how to buy and sell gold and silver in my book “Buy Gold and Silver Safely” that eliminates this concern; the information I give here in this article is generic in nature).

The “10% selling cost” he mentioned in his podcast isn’t correct either, but he doesn’t tell his listeners what type of gold he was selling back to the gold dealer he referenced in his story, so I can’t comment on it.  It can be more than 10% if you’re not careful, but this is not true with bullion (depending on the gold dealer).

Insurance issues have nothing to do with buying or selling if one can pick up their own coins, but there are ways around this as well.  There are even problems insuring gold that people need to be aware of.  Hartman doesn’t address this issue.

Hartman says “Real estate actually benefits from its lack of liquidity because combined with higher transaction costs, this equates to lower volatility.” Tell that to the owner of a house who is seeing their value go down and wants to sell.  Even if they haven’t yet decided to sell, higher transactions costs, 6% for most people, just takes away from profitability.  Volatility will occur moving forward when interest rates begin to rise, making the liquidity of real estate an even bigger issue as buyers dry up.

7. If gold does go up in value, the gain is nominal rather than an actual increase in buying power. This is because when gold appreciates it typically coincides with a devaluation for paper money. Moreover, those gold profits are taxable, in contrast with the “most tax-favored” status enjoyed by real estate investment. By exploiting the 1031 tax-deferred exchange it is possible to trade up tax-free with property for a lifetime. Even if the dollar depreciates, your asset appreciates with inflation and you will have locked in a long-term loan that you repay “for free”.

What we have been seeing since 2006 is more deflation in real estate and an increase in the purchasing power of gold, year over year.  You can buy more real estate today with that shiny metal than you could in 2006.

On the podcast, Hartman correctly talks about gold going to $1,500 or more in price but that it’s “not gold going up, but the dollar, yen or whatever, going down in value.”

Today we have gold moving higher with a U.S. Dollar moving higher.  Why?  Buying pressure because there is much uncertainty in the Eurozone with the Greece debacle.  The EURO has been beaten down, losing 30% to gold in the last 6 months alone.  I recommended people buy gold in EUROs last December, and they have done better than those who owned gold in U.S. Dollars.  But those who own it in Dollars have done quite well too.  I’m presently recommending people dollar cost average into a position of buying gold in YEN.  In reality, every country’s citizens should be buying gold.

If you own something that can be sold in the future for more than what you bought it for, that’s not a bad thing….. whether you call it “money” or an “investment.”  There are more people clamoring for gold and silver world wide than there is for real estate in the U.S.

If one owns real estate they have to realize it is a real asset just like gold and will go down in value with the dollar just like stocks, bonds, etc.  I made this case in DOW 10,000 In 2009 Is NOT the Same as DOW 10,000 In 1999 – It Buys You 23.8% Less Today

What would the DOW have to be at today to be the equivalent of DOW 10,000 on 3/12/99?  Simple math tells us it needs to be 23.8% higher, or 12,380 to make up for the decline of the U.S. dollar’s purchasing power.

Lastly, in selling gold, there are ways to sell gold tax free and avoid the 28% tax on capital gains.

Conclusion:

Is gold an Investment?

Gold is insurance against the portion of your portfolio that is U.S. Dollar based (stocks, corporate and government bonds, cash, etc.).  Gold mining stock are an investment.  Gold is also money, a medium of exchange.

Is Real Estate a better investment than gold?

I leave it to the reader to decide what is a better place to put one’s money right now based on the above rebuttal.  Whether or not gold is an investment or insurance against a falling dollar, EURO or Yen, or whether it can be considered an investment at all, is irrelevant.  The last 10 years has shown Gold to be a better place to have your money than any other investment out there.  That’s where the smart money is right now.

Moving forward, there can be signs of speed bumps for gold as I point out in my article “Buy Gold Now or Wait? What Will Gold Do Next?”

One thing Hartman says makes sense for real estate buyers.  If one can lock in a low fixed rate in the years to come, and inflation takes hold again, your 5% loan is going to be looking mighty good.  However, just as with Japan and their two decades of deflation, we here in the U.S. could be in for a few more years of declining real estate prices as noted in the above article, even if the price of gold were to remain steady.  This would mean your gold held today would buy you more real estate in the future.

When interest rates rise in the future, it will be a negative for real estate as fewer people will qualify to buy.  Secondly, unemployment is a real issue and will be for years to come.  The U.S. Labor force cannot compete with the rest of the world when our wages are so high comparatively speaking.  Unions are breaking the backs of many companies (let alone state and local governments) in trying to keep things propped up.

The U.S. is primarily a consumption and service driven economy at present.  Until we start producing something the world wants again, our economy won’t improve.  The only thing keeping GDP going right now is the result of government spending producing some green shoots.

Until the real unemployment numbers improve, the demand for real estate won’t be returning.

Nothing goes straight up, as Real Estate investors know.  When the Real Estate market bottoms, which is still a ways away, one can take their gold and buy some.  That’s what I’ll be doing depending on economic conditions, at a much higher gold price than today.

Of course I would never recommend one put all their money into gold and silver, just as one shouldn’t put all their money into real estate.  There’s room for diversification.

I’m not writing this article to say real estate is a “bad” investment.  I know many people who have made their wealth from investing in real estate.  They simply had good timing.  Many of those people haven’t sold their homes yet, so they haven’t locked in that wealth.  Their future wealth is left to the whims of the market.  To discover what’s really going on in the real estate market, and whether it’s a good market or not where you live, head over to Patrick.net for a dose of reality.