I bought a house in Asker, Norway for 1.7 mill NOK in 2004. This was financed with 1.2 mill NOK in bank credit and 0.5 mill NOK of savings. The price of gold was at the time around 120 NOK per gram. The money put up for the house was about 14 kg, where 10 kg was borrowed and 4 kg was savings.
I sold the house again in 2017 for 4.7 mill NOK. The price of gold was at the time roughly 300 NOK per gram. The money received from the sale was about 16 kg. My bank loan was down to 0.9 mill NOK, corresponding to 3 kg. The remaining 13 kg was my cut of the sale.
Meanwhile in Porto, my wife bought a flat for €140.000 in 2005. This was financed entirely with bank credit. The price of gold was at the time at around €11 per gram. The money put up for the flat was in other words 12.7 kg.
When I sold my house in 2017, my wife's flat was priced at €120,000. My wife's loan was still at €140,000. The price of gold was €36 per gram. My wife's flat was no longer 12.7 kg, but 3.3 kg. Her debt was also down. It was no longer 12.7 kg, but 3.9 kg.
The situation in 2017 was as follows:
- Asker: house = 16 kg, loan = 3 kg => 13 kg realized gain
- Porto: flat = 3.3 kg, loan = 3.9 kg => 0.6 kg unrealized loss
Note that my wife didn't suffer much from the drop in her flat's value. The fact that she forked over what amounts to 12.7 kg of gold for her flat back in 2005, didn't translate into any great loss because she financed her purchase with bank credit.
Similarly for me, my profit was not primarily due to the fact that I got 2 kg more for my house when I sold it. It was due to the fact that my bank loan was reduced from 10 kg to 3 kg, with me only paying down 1 kg of this.
My wife was lightly burned by her credit financed purchase while I was greatly advantaged. Our combined profit ended up at about 12 kg.
However, if we had both paid in gold, the situation would have been different. The only benefit to us would have been the money saved by the fact that we wouldn't be paying any interest.
Assuming that my wife paid 4% on her €140,000 loan and that the average gold price was about €20 for the 12 year period, my wife would have saved herself a total of €67,000, corresponding to about 3.5 kg of gold.
My loan was at about 5% on a 1.2 mill NOK loan. The average price of gold for the 13 years was about 200 NOK per gram. My saving on interest payments would have been 780,000 NOK, corresponding to about 4 kg of gold.
The situation in 2017 would have been as follows:
- Asker: profit on house = 2 kg, interest saved = 4 kg => 6 kg realized gain
- Porto: loss on flat = 9.4 kg, interest saved = 3.5 kg => 5.9 kg unrealized loss
Our combined profit would have been zero rather than 12 kg.
The lesson we can draw from this is that we should never buy anything with our gold unless we get a lot for it. We should instead use bank credit. Our gold should serve as our personal security, only to be used in extreme situations.
By extreme situations, we're talking about Dow/gold ratios below 4 and three-bedroom apartments selling for less than 2 kg. Such conditions indicate that gold is in bubble territory. It may also be difficult to get hold of credit when such bargains abound, so we sell our gold in order to finance our purchases.
The value of gold as personal security becomes apparent in situations where financial conditions suddenly tighten to the point of squeezing us financially.
Imagine buying an apartment for 6 kg of credit at an interest rate of 4%, only to be caught up in a financial crisis with interest rates suddenly at 20% and our apartment not fetching any bids higher than 1 kg. People will be forced to sell to cover their debt. However, those with a gold holding can use that to cover part or all of their debt.
To illustrate, we can return to my wife's situation in 2005 and 2017. Let's say that she had 6 kg of gold in savings that she kept as security when she procured a loan corresponding to 12.7 kg for her flat. That security could then have been used in 2017 if she had been caught in a squeeze. My wife's loan had at that point been reduced to 3.9 kg. Her gold savings would have covered this, and she would have gotten through the squeeze without having to sell her flat.
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