If you read our last article, “Gold – The Trust Factor,” you will know that we ran through the idea of having an overview of the general investment climate before you even begin to look at putting your money into something.
We want to take this further in this article, and outline a couple of other pointers that might help you to decide whether the timing of your investment is sound.
Some would say there is very little point in buying a house, for example, at the top of a bubble in the market. Much better to wait – even a couple of years – until house prices come down, and then buy. The logic of this is that the amount that you would pay on the difference in mortgage payments over many years, is far outweighed by the reduction in the price of the house.
This same principal applies to all markets. All have known cycles. Some are fast moving – others take years.
Spotting these cycles can pay dividends.
For almost everybody, the biggest purchase they will ever make in their lives will be their house. This is an important bellwether for any economy – is the housing market going up or is it coming down? A healthy economy will see housing grow, year-on-year, on a gentle sliding scale. Too much and the housing market overheats, crashes, and this causes foreclosures and forced sales.
A stagnant housing market, with no gain, might be an indication of a stagnant economy where wages are not rising, and the economy has stalled.
A falling housing market would indicate structural problems in the economy – perhaps rising interest rates, inflation, and unemployment.
UBS (Union Bank of Switzerland) regularly produces a housing report which details the state of the housing market throughout the world.
This is the current one – which was published at the tail end of last year.
You can see at a glance from this chart that there are eight cities which are seriously overpriced (these eight have had house prices increases of almost 50% since 2011) and are likely to face a correction. There are a further seven cities which are overvalued and equally susceptible to a fall in prices should the first eight topple.
Unfortunately, there is no hard and fast rule about such projections and how you should go about investing in such markets. If you wait, and there is no correction, you may have missed out on years of growth, and will not be able to afford to get into the market at all. On the other hand, if you wait, and prices do fall, you could save yourself huge sums of money.
This is the dilemma facing all investors – in all areas.
There are other indicators of the health of the economy which are little-known, but used extensively by “the smart money.” By, smart money, we mean the investment firms that seem to know what the market is going to do – before it does it!
For example, when the economy is stalling, naturally people buy less. They order less from Amazon, they buy less food, they order fewer cars, their spending on all kinds of goods and services is curtailed.
Obviously, all of the items they normally buy would have to be transported from their place of manufacture, to their markets. It would make sense then, that if less was being sold, less would be transported. It would be great if there were some kind of tracking of such delivery data available.
Many clients are surprised to learn that there is such an indicator – it is shown below.
The Dow Jones index is known to everybody as a measure of the strength or weakness of the stock market. What is less well-known is that there is this “Dow Jones transportation index” too – and it is actually older than the “Dow Jones index,” which is so familiar. This transportation index is seen as a means of gauging how the American economy is performing.
The idea is that it will give an early warning of a downturn in demand. If less is being transported, it is a sign to watch – less people using aircraft to travel on vacations, fewer business people on company trips, and less goods being flown, shipped and driven, are all signs of a possible shift in the overall direction of the economy.
It forms part, of what is known as, the Dow theory, which is an overall assessment of six factors which predict markets.
Without going into this in great depth, it is easy to see that information – good information – is publicly available, at the click of a mouse these days.
Gold, silver, and other precious metals are also subject to all kinds of variables. Silver is used in a wide range of industrial applications – so increased demand for any of the products that use it will lead to increased mining activity, refining, transportation, and price rises. Gold is used extensively for jewelry, of course, so a downturn in spending on this, because of a recession or interest rate rise, could lead to a fall in the price of gold.
In Asian and Middle Eastern countries, gold is used more widely as a savings medium, and as an emergency fund. A war, or unrest, in these regions may result in an upturn in demand – and a price increase..
All of this knowledge will give you a feel for whether the investment you are thinking about is a good idea or not. This will also enable you to assess whether the advisers you choose are taking these things into account when they are suggesting their investment plans.
Knowledge like this, as we said before, can help you to make informed decisions instead of hopeful guesses.
Next time, we will look at specific signals and indicators which affect the gold market – what to look out for – and what to follow. We hope you can join us …