In inflationary situations, investors instinctively head for hard assets. One popular haven is real estate. Another is precious metals. These assets are bought for different reasons. Real estate has an utility independent of its monetary value. If you own a house, you can live in it or even work out of it. The price of the property in question may fluctuate but that utility remains.
Precious metals have little utility for individuals. Gold, silver and platinum do have industrial uses. And of course, jewellers, fashion designers, etc. use precious metals. But people buy precious metals as an investment, rather than their utility. When paper currency loses value, gold and to a certain extent, silver and platinum gain.
Gold has been in a multi-year bull run since the subprime crisis. The double-dip recession and the very real fears of a Eurozone collapse have pushed it up further. It's become especially expensive in rupee terms because the rupee has devalued while India remains the world's largest hoarder and importer of gold.
For the past two years, I've thought gold was too expensive to hold comfortably. But it's continued to head north, and not just in rupee terms. Despite the continuing bull run, I still think gold is too expensive for comfort while freely admitting that it could get even more expensive.
The reasons why I'm unhappy about greater gold exposure are a little nuanced. Most investors buy gold as a permanent asset. They intend to bequeath it to their children. It is a hard quasi-currency, which has historically held value, justifying this buy and hold philosophy. Nobody who buys gold is generally comfortable selling it.
But right now, gold is near historic highs, driven by extremely unusual circumstances. If there is indeed all-round disaster and currency collapse, etc., gold will continue to be a superb asset. The run up in value is precisely because it is a hedge against disaster.
But there is also a pretty decent chance that the global economy will pull out of the current crisis rather than go under. The instant a recovery looks sustainable, the value of gold will start to decline.
At some stage, when it becomes apparent that the worst is past for the global economy, gold will see a sharp correction. Whenever that happens, investors will have to unload their excess holdings and switch asset-allocations.
If you have a trader's mentality and you're prepared to consider buying gold as an asset where you're eventually going to book profits (or losses), it may be a decent buy. Buying via ETFs, rather than directly hoarding physical metal, may even make it psychologically easier to sell, when that time comes around.
In the near-to-medium term, platinum also looks interesting though it's much more difficult to take meaningful exposures. Labour union problems and violence in South Africa's mining industry means that there is fear of supply disruptions of the white metal. Unlike with gold, an economic recovery will drive demand for platinum due to its use in catalytic converters, etc. To some extent that will protect against price correction, if economic growth picks up. The same logic of rising industrial demand in a recovery holds true with silver as well.
The other typical inflationary hedge, real estate remains a big question mark as it has since 2009. Leaving the undoubted utility of real estate aside, pricing is key. In India, pricing is very non-transparent and the local variations are massive. Property on one side of a street may well cost twice as much as property on the other side.
The industry has been hit by many problems. Property developers are cash-strapped and mostly trying to deleverage debt off balance sheets. There is an excess of real estate supply in many places. There are also many stalled projects.
Demand has dropped for several reasons. A business slowdown has impacted commercial demand. High interest rates and EMIs have led to a cooling off in the residential mortgage market. At the same time, there are pockets, in fact large areas, where the real estate industry continues to do well.
There can be no one-size fits all recommendations where real estate is concerned. However, one can say that it's very likely interest rates have peaked. Given that mortgages are typically long-term floating rate loans, somebody buying residential property now could expect EMIs to drop through the next few years.
Also given the generally depressed conditions at the moment, real estate prices are more likely to appreciate than not in the medium-term. Give care and due diligence, it may be a reasonable bet to invest in real estate.