Maloney's Cyclical Predictions

I have heard several times now, that 500oz of silver will buy a median priced home in the US at the peak of the precious metals rally.  This stems from a video Mike Maloney put out ( a member of the Kiyosaki MLM financial education team).  I have received a couple questions regarding this play which is based on Maloney's analysis of cyclical theory (in which he includes only precious metals and real estate).  

Currently a median priced US home is roughly $160,000 and silver is currently $36.19 per ounce.   Making the median US home currently equal to 4420ozs of silver.  In the late 1800's a median priced home would cost you 4,000-8,000ozs of silver,  and was roughly the same during WWI.  During the time period of WWII it would take 10,000-16,000ozs of silver and during the 1980 intraday peak of silver it would have taken less than 900ozs of silver to purchase a median price US home.

Important to note mortgage rates will typically rise in the environment where silver goes parabolic making it more difficult and more expensive to finance a home during this time.  So the theory is quite sound that moving from asset class to asset class may provide many benefits by simply being ahead of the crowd.  It is safe to say we are already seeing a below average house price to silver ratio.  Historically below 5,000ozs per US home is at the bottom end of the cycle. 

To quote Maloney "you don't want to hold on to gold and silver forever, you want to hold on to it until a median priced single family home costs less than forty ounces of gold or five hundred ounces of silver, and then you want to trade your gold or silver for real estate."  I wouldn't wait that long, during 1980's peak the US home to gold ratio briefly touched 100:1, so Maloney is expecting the ratio to be more than twice as narrow.   

So why not advise your mother to sell her home and buy gold and silver, only to purchase a similar home in the future at a discount to your silver's increasing nominal value.  Buying and selling homes entail additional costs, I'll give a few reasons this may be impractical for the average American.  

The theoretical median house you own appraised for $160,000 based on sold comps in your area.  First let's list the house for sale (5-7% broker's commission), pay closing costs, which has almost become tradition for sellers (1.5%), moving costs and new housing while you wait for a lower home to silver ratio (est. $5,000), assuming you are in a stable sub-market where you will get a full priced offer, which is unlikely so I will subtract 5% from the asking price of $160,000.

Asking Price: $160,000

Purchase Price: $152,000

-$9,120 comission

-$2,280 closing costs

-$5,000 relocation costs

Which leaves you with $135,600, a loss of $24,400 or 15.25%.  If you have owned this home for sometime or purchased it a discount originally, you also will owe taxes on the profit from the sale.  This process could take 6 months or more.  

But now you have extracted 3746ozs of silver from a house worth 4420ozs (assuming you weren't required to pay taxes on any gains from the home sale).  Now we hold the silver and wait for the ratio to decrease.  The inflation adjusted high (intraday) of $128/oz for silver isn't as conservative so we'll use $100/oz, your 3746ozs are now worth $374,600.  

Reselling back the bullion you take a 5% premium hit selling your bullion and are paid $355,870, for a profit of $203,870.  The tax rate for your bullion is 28%, leaving you with a profit of $146,786.40 and a lump sum of $298,786.40 to go out and purchase a median priced home. 

Historic home appreciation is roughly 5% (but in a depressed housing market, we will use 4%) and would make that median priced home $176,400.  

Again we must add commission ( i will defer this as we had paid full commission in the original transaction) , moving costs, transfer tax, utility hook ups, title insurance, inspection etc.  Adding another $4,000 to the cost of the home.  $180,400 cost subtracted from the $298,786.40 lump sum, leaving you with $118,386.40 and a median US house (granted the costs were not exactly all inclusive but a general representation).

 This assumes we time the market correctly and know when to sell.  Maloney's prediction of 40:1 and 500:1 brings us to $4,000/oz for gold and $320/oz for silver if home prices remain stagnant.  I do agree with Maloney that the problems facing us are worse than in the late 1970's, but he assumes the previous inflation adjusted high ($2,176) for gold will nealy double allowing you time to purchase a home for less than 40oz of gold and assumes silver will roughly triple it's previous inflation adjusted high ($128).  These prices are very possible but are well above conservative or what we could suggest to the average home owner.

I conclude that this strategy be made whole by selling into the mania phase incrementally as we reach key levels ($75, $100, $150, or GSR 20:1 or Home to Silver 2,000:1) and holding a portion of the precious metals in case we see a lengthy all out collapse of the fiat currency system.  Though I know the financial system and world monetary policies are beyond flawed, if fixed income rates are raised high enough and currency is made stable enough, the flight to safety could end very quickly.

If you don't time the market correctly you may lose 25-50% of your value and possibly not be able to repurchase the median priced single family home or increase purchasing power at all.