Supporting Bad Real Estate Drives up the Price of Gold and other Commodities

November 15, 2010

Texas gold bull Shayne McGuire predicts gold will reach $10,000 an ounce (“The World Does
Not Need to End,” WSJ, Oct 30), over 4 times its $2250 inflation-adjusted peak in 1980. Even if
it doesn’t reach that round number, gold’s steady rise is warning us about other assets.

One way to look at gold is that it is a neutral asset -- it generates no yield, costs little to hold,
and total supply grows slowly. When Federal Reserve and government policies support bad
assets with easy money, like $5 trillion of excess commercial and residential real estate, the
neutral asset and other commodities become more valuable in dollar terms.

Approximately 15% of our nation’s housing stock is vacant, and over 10 % of our retail and
office space sits empty. Unlike neutral assets, these excess real estate assets drain resources
from our economy since their holding costs are substantial. Rather than encourage the
elimination of these excess assets, Fed and government policies are trying to protect these bad
assets with 0% interest policy, buying $1.5 trillion of mortgages, ‘pretend and extend”, TARP,
PPIP and TALF.

Neutral assets like gold and other commodities like oil and food become more valuable in such
an environment. The more we protect those bad assets, the higher we can expect gold and
commodity prices to go. $10,000 an ounce is a possibility.

 

Michael Messner
November 15, 2010
New York, NY
(212) 838-6055