Are these two commodities trying to tell you something?

We’re still just a little more than a week removed from a mind-blowing 9-day mind-meld with brilliant thought leaders, niche experts, and seasoned investors and entrepreneurs …

… so we’ve been busy catching up on the news and looking at the world through our freshly expanded paradigms.

There are two things bouncing around our brains we think are important, but few real estate investors are paying attention to …

Gold and oil.

Sure, both these “commodities” fit well with real estate in a strategic real asset portfolio.  And if you’re not sure how all that works, you can start with these past podcasts about gold and oil.

But bigger picture, both gold and oil probably drive more of geo-politics than most casual observers realize … and both are quasi-proxies for the dollar.

In other words, when you understand what’s happening with gold and oil, you have insights into the future of the dollar … and some of the things governments are doing to either defend dollar dominance … or break free from it.

Of course, if you earn, invest, borrow, or denominate wealth in dollars, the future of the dollar should be of great interest to you … even if you think of the dollar as being as permanent and reliable as air (it’s not).

As real estate investors, our primary interests (besides occupancy and cash flow) are demographics, migration trends, local economic strength, interest rates, taxes, and the supply and demand dynamics in our local market.

But all of that sits on the foundation of a functional financial system with two primary components … credit and currency.  Gold and oil provide insight into both.

Oil is important at both the macro and the micro level.

In the macro, it takes energy to drive economic activity.  When energy’s expensive, it drives up the costs of everything and is a drag on economic activity.

At the micro level, high dollar-denominated oil prices drive up the cost of living for your dollar-denominated tenants.

But for metros where oil is big business, oil also means local jobs.  Remember, Texas and its robust energy sector were the primary driving force for U.S. job creation coming out of the 2008 recession.

Investors who realized this (like our pal Kenny McElroy) strategically invested in those markets while most people were hiding under the sheets.

So whether or not you’re interested in oil as a direct investment, paying attention to the oil business can be a great way to pick markets likely to hold up well if oil prices rise.

Oil also has a potential impact on credit markets and interest rates.  Billions of dollars of debt has been created to fund shale oil production.

If oil prices drop, it both undermines the ability of regional oil economies to grow … but also for those employers to service their debt.

In the macro, if a big chunk of the debt goes rotten, credit markets could tighten.  Think about what happened in 2008 when sub-prime mortgage debt went bad.

So again, whether you’re an oil investor or not, the oil industry has a direct impact on your real estate investing.

Watching oil helps you see what’s coming sooner … so you have time to position yourself to capture opportunity and mitigate risk.

Of course, the good news and bad news about real estate is it moves slowly.

So while you have plenty of time to be proactive IF you’re paying attention, it’s really hard to act fast if you’re not.  That’s why we pay attention.

What about gold?

On the macro level, gold is a good gauge of how the world feels about U.S. Treasuries and the dollar.

When things get choppy in stocks, paper investors worldwide tend to flee into Treasuries for safety.  After all, Treasuries are backed up by the Fed’s printing press.

Of course, what does the Fed print?  U.S. dollars.

But to quote Watto from Star Wars – The Phantom Menace … 

“Republic credits are no good here.  I need something more … real.”

That is, when investors worldwide are looking for safety … and they don’t trust the paper … they go into gold.

So what does that mean to real estate investors?

Remember, mortgage rates and availability derive from healthy bond markets … most notably, U.S. Treasuries.

The 2008 Great Financial Crisis had its genesis in a broken bond market … mortgage-backed-securities.  When those went bad, frightened investors worldwide piled into Treasuries … and rates fell.

But what happens if investors worldwide don’t trust Treasuries?

You don’t have to wonder.  China came out in 2009 and scolded Uncle Sam about the size of the deficit and all the dollar printing doing on.

Why did it bother them? Because they own TRILLIONS in U.S. bonds.  They don’t want to get paid back in diluted dollars.

But Uncle Sam’s debt, deficits, and printing have BALLOONED since then.

So it’s no surprise that China … along with Russia and several other countries … have been diligently accumulating and repatriating gold.

They’re getting out of dollars and Treasuries to do it.  And who can blame them?

Paper money has an atrocious long-term record as a store of wealth …

 

Interesting Image

Source:  World Gold Council 

Consider this when you think about where you’re storing YOUR long-term liquid wealth.

Meanwhile, there’s just a little more to the developing story of gold … and the story behind the story.  It’s a little complicated, but interesting and noteworthy.

After the 2008 crisis, the world’s bankers got together in Basel, Switzerland to come up with voluntary rules to prevent another financial crisis.  The agreement is called the Basel Accord.

A provision in the agreement, known as Basel III (the agreement’s rolled out in phases) allows financial institutions to consider gold “Tier 1” capital.  So adding gold is supposed to make banks more liquid and stable.

This is a bit of a promotion for gold.  Some observers think this means demand for gold will increase, but we’re not smart enough to have an opinion on that.

But there are a couple of things we are thinking about …

Perhaps most obviously, international bankers apparently consider gold more valuable than simply a “barbarous relic” with no place in a modern monetary system.

Keep that in mind when you hear people criticize the placement of gold in a portfolio. If gold can make a bank more stable and liquid, can’t it do the same for you?

To be clear, we’re not fans of gold as an investment.  It’s just an alternative to cash … a way to store long-term liquidity while hedging against a declining dollar and bank counter-party risk.

But the more interesting aspect of gold’s now elevated role in bolstering the banking system is why it’s necessary in the first place.

Is it because the banking system is still fragile and in need of support?  Is it because the world needs more leverage to expand … and so more collateral to lever?  Why not just use Treasuries?

We don’t know yet.  But we’ll be checking in with our big-brained gold experts to see what they think.

Meanwhile, we encourage you to think outside both the real estate and mainstream financial media boxes.  It seems like oil and gold might be trying to tell us something.

Are you listening?

Until next time … good investing!


More From The Real Estate Guys™…

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The mid-term morning after …

If you’re an American, unless you’ve been in a coma or living under a rock, you know the United States just had one of the most energetic mid-term elections in quite some time.

The day after, both sides are disappointed … and both sides are claiming victory.

One of the advantages of being older is we’ve seen this movie before.

In our younger days, when elections didn’t go our way, we thought it was the end of the world.  Today, not so much.

It doesn’t mean we don’t care.  We do.  And certainly, politicians and their policies have a direct impact on our Main Street investing.

But it’s in times like these we’re reminded of the beautiful, boring stability of real estate.

Because while all the post-election drama and speculation plays out, people still get up and go to work and pay their rent.

And though the Trump-train just got slowed … like Barack Obama before him, big chunks of his agenda got pushed through early … and are likely here to stay for a while.

In other words, it doesn’t look like Obamacare or the Trump tax reform will be repealed any time soon.

More importantly, investors of all stripes … paper and real … now know what the lay of the land is for the next two years.

Early indications (based on the all-green dashboard of Wall Street) reveal there’s cash on the sidelines waiting to see what happened … and now that gridlock is the answer… money is pouring into everything.

We know that sounds counter-intuitive.  But while political activists push change … too much change too fast makes money nervous.

Investors and entrepreneurs need to make decisions about long-term risk and reward.  And when the world is changing too fast, those decisions are harder to make.

Way back in the lead-up to the 2010 mid-terms, we penned this piece about a concept we call “healthy tension.”  Just change the team colors and it’s just as applicable today as it was back then.

The point is that money and markets like gridlock.

At this point, from an investing perspective, it doesn’t really matter if any of us like or dislike what happened … politically.  It’s done.

Now we all just need to decide what it means to us and how to move forward … because life goes on.

So bringing it all back to Main Street …

We’re guessing all the great Trump-tax reform benefits for real estate investors… from bonus depreciation to Opportunity Zones … are here to stay.

And as we said just a week ago …  there’s probably a lot more money headed into real estate.  Nothing about this election appears to change that.

So gridlock inside the beltway means stability on Main Street.

Sure, it might be a little boring.  But real estate investors are used to boring.  And when it comes to long-term wealth building … boring is good.

Until next time … good investing!

More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!