Business: Spreading Rush to Tangibles

In the past twelve months, they have soared like Superman

Gold is not the only game in town. From fine art and oriental carpets to housing in the suburbs and vacation land in the sticks, Americans in record numbers are doing something that they have never done before— bailing out of their own national currency and dashing for inflation hedges wherever they can find them. Like generations of inflation-scarred Europeans, they are parking more and more of their wealth in investments that do not necessarily pay interest but at least prom ise to preserve value in the face of exploding prices.

The rush to collectibles like period furniture, Chinese ceramics and rare postage stamps has been luring wealthy investors for years. But the Price Spiral of ’79 has turned the investment binge into a man-in-the-street stampede to tangibles of all sorts. Explains Wall Street Economist Gary Wenglowski:

“For five years no financial asset has yielded a positive return after taxes and inflation. Consumers investing in tangibles are only acting rationally.”

In the past year especially, investment in precious metals, gems and real estate has seemed almost too good to be true.

But investors looking to turn a quick profit instead of to protect their capital for the long haul often have not done well at all.

Gold’s rise of over 60% during the past twelve months to $385 per oz. has been spectacular, but that goes for its gyrations too. Though investors by the thousands routinely speculate on possible price movements of the yellow metal by buying and selling so-called futures contracts on commodities markets, trading in the actual gold itself is much more limited, and a mere handful of big investors can and do bring about significant changes in price. In just four weeks, gold leaped from $330 per oz. to hit $447, only to lose half that impressive gain by the end of last week. Anyone who plunged in for a quick killing at the wrong moment got badly hurt. Small investors in gold also must pay a sales commission of 6% to 10% when buying the metal from banks, brokers or jewelers. In addition, there is often an equal-sized charge when reselling it.

Other investment metals have been better buys in the past year. Platinum, at $5 10 per oz., has risen by almost 75% since last October. Silver, at $15.92 per oz., has nearly tripled, largely because investors have been buying it as a sort of poor man’s bullion.

Precious stones are also being snatched up, though unwary investors can lose disastrously. In the past year, high-grade “investment diamonds” of one carat or more have risen 45% in value and now often sell for $31,000 per stone. But smaller and flawed gems, which are normally sold only for jewelry to hide the imperfections, may be poor buys; four quarter-carat, lesser-quality stones are usually worth much less than a single good-quality, one-carat stone.

Most reputable diamond houses certify the quality of their gems and agree to repurchase them from customers at the prevailing market price for a fee of perhaps 5% or so. But if a dealer goes out of business, those who bought from him might find themselves having to sell their gems elsewhere for maybe 500 on the dollar. The same is true for emeralds, an other of this year’s hot rocks. Mostly because of high demand from Europe, top-quality gota de aceite (drop of oil) gems from Colombia have climbed 33% in the past twelve months and now cost three to four times as much as similar-sized diamonds. Yet lower-grade emeralds are very poor investments: they are sold virtually by the shovelful as semiprecious stones, there are no universally recognized grades or appraisal system for them, and only a highly flexible and informal trading network.

Real estate is also not one big market but many little ones. In the past year the new single-family house has increased in value by a nationwide average of 17.2%, but houses in Sunbelt states have risen more than those in the energy-dependent Northeast. Condominiums have done well almost everywhere. In Miami, new condos have risen 27% in value, and luxury projects are sold out even before construction work begins. In Chicago, condo values are shooting up at a 19% annual clip. Economist Otto Eckstein calculates that at least 12% to 14% of U.S. housing purchases are made not because people need houses but because they speculate that they can sell them at high profits.

Investing in raw land is more complex, and riskier.

Farm land now goes, on average, for $559 an acre, an increase of about 15% over last year, but location, development restrictions and a host of other considerations Housing: are what really matter. Real estate investors are paying $30,000 an acre for avocado farms around Santa Barbara, Calif, but only for housing development. Anyone paying that much in order to get into avocados would be crazy; at present prices for the fruit, an acre of avocado trees normally yields no more than about $2,500 per year. Conversely, anyone interested in cattle would have to pay $2,000 an acre for northeastern California ranch land, but state agricultural assessors estimate that for any other use the sage and scrub grazing pastures are worth no more than about $15 an acre.

Some investments are clearly bummers no matter how they are billed. For example, anyone who bought an $8,500 ranch mink twelve months ago might well have to pay $10,000 for the same coat today, a rise of nearly 18%. But getting into a mink is easier than getting out of one, and the resale value of a fur that is a year old is rarely if ever the full initial purchase price.

Yachts are another doubtful investment. Gloats Barry Ware, a yacht broker in Marina Del Key, Calif: “Our customers want to get out of money and into anything. If they can afford it, they are going for boats.” They should think twice.

Some top-quality used vessels are appreciating in value by as much as $1,000 per month, but that is usually only true for yachts that already sell for more than $100,000. In addition, maintenance and insurance costs for these can add as much as $20,000 a year to a skipper’s bill.

The real risk of the tangibles scramble is the impact that it has on the economy as a whole. By encouraging an at titude of buy now before the price goes up, panicky consumers are making further and even steeper price increases virtually inevitable. Yet people are not about to change their attitudes until inflation itself is brought under effective control. If that does not happen, the nation may some day discover that “basket of currencies” does not mean merely francs, marks and yen but also, perhaps, bullion, baubles and condos.