Over time, capital moves to the place which offers it the highest and safest return. Simply, money moves to investments that offer the highest and lowest risk return. Often, when the return gets too risky, capital moves on to new pastures.
In the 1980s, when inflation came under control and interest rates started to decline, money moved into the stock market from precious metals. A bull market in stocks started in the early 1980s and continued until early 2000. The euphoria hit in the stock market in 1999 when investors jumped on the proverbial tech bandwagon. The rest is now history.
Tech stocks topped out in late 1999 and early 2000 and money (or should I say capital) moved out of stocks. The NASDAQ is still down 50% from its 1999 price high–the effect of what happens when capital leaves an investment in exodus.
With interest rates moving low and lower, capital moved out of stocks in 2000 and into real estate. And since 2000, we can safely say most real estate has about doubled in price. Now, as interest rates have risen and property prices have risen, overbuilding has taken place. As evidenced by what the new-home builder stocks and the real estate market itself is telling us, real estate is not in big demand like it used to be.
Where’s money moving to now?
There’s no doubt capital is moving into precious metals. Sure, one can argue that precious metals don’t offer dividends or interest payments to investors, but money always moves to the highest and safest returns… and right now those returns are in the metals in the form of capital gains from higher prices and security.
Investors all over the world became weary of the U.S. dollar. They asked themselves: What’s the safe haven for money now? And, they’ve found that haven in the precious metals. Since 2001, I’ve been telling my readers or anyone who would listen, to get into precious metals. I still believe it’s not too late either.
But, just as important, as investors, we must realize that capital is now lukewarm on real estate–it’s not the best money game anymore. Like the route gold took into the 1990s when metal prices plummeted because there was no demand… like the path stocks took after the 1999-2000 bubble… real estate will eventually follow the same path down in price. History proves this is how the money game works.