Customers keep asking me what to do as far as unrest on the eastern border is concerned.
Due to the war threat in Ukraine the emotions are at their peak, and the questions are surprising. While some customers ask whether to buy gold, others wonder if they should sell precious metals and place the funds in Switzerland (and then move there). As for the issue of moving to another country, for example to Spain or another place in Europe, I recommend that you read our text about changing the tax residence. To the hot-headed ones thinking about buying dollars, for example, I suggest to cool down, open a bottle of wine and take a look at how the situation on the investment markets has been developing over the last 20 years.
Obviously, I am referring to the investments that are perceived as conservative, i.e. providing reasonably steady growth and protecting capital, and the questions are being raised more and more often when we face the fear of an armed conflict. Investments in gold and real property are considered as cheap and rather well-known to everyone, as well as investments in the US dollar, which are still very much popular with a part of our society.
What does the analysis show?
The following analysis shows the changes to the portfolio if we purchased particular assets 20 years ago. That is, when we invested PLN 1,000.000 in each of these assets, the analysis indicates how the value of the portfolio has increased over 20 years and its value today.
How the gold market has been developing?
When we ask a theorist about an investment in gold, we will probably hear that it is a safe asset that provides protection mainly against inflation. If we look at the history of the last 20 years, it works extremely well – so well that it is hard to say about the conservative nature of the investment in gold.
It is worth paying attention to the changes of gold prices in the periods of crisis, i.e. the years 2008, 2012 and 2021. In the period between the years 2008 and 2012, the price of gold increased to 219.4%, which gives an average increase of 54.75% per year. An important factor that influenced such an increase was the crisis in the year 2008. After a temporary decrease in price since the beginning of the pandemic in 2019, gold price increased again by 31.5%. It is assumed that this metal provides a great protection of capital against inflation or helps to store cash during periods of economic uncertainty, and there are very good reasons for this. We should be talking about unrest today. Gold is a desirable metal and its supply has been at a very low, constant level for many years and it cannot be printed as fiat money. The historical analysis only confirms that gold is doing well during the period of economic slowdown and crisis. However, if we go back to the issue of protection of capital against inflation and return on investment in gold, it turns out that the buying power of PLN 1 million in the year 2000 – today equals 1.78 million.
In other words, in order to have the equivalent of PLN 1 million from the year 2001, in the year 2022 we need about PLN 1.8 million, which results from cumulative inflation for this period, it reached 79%! If at the same time PLN 1 million was invested in gold, such an investment turned out to be “a little more” profitable, generating PLN 6 million profit. Now the question is what was the actual inflation during the examined period of 20 years.
It must of course be taken into account that currently, i.e. at the beginning of the year 2022, the fluctuations in the price of gold are huge. However, this does not change the fact that gold is a hedge against inflation in the long term, and before the potential armed conflict, it is gold that ensures safety. It is true that now, in the post-covid era, the economy is heated up, and all governments led by the US are pumping huge amounts of money into it. Companies are experiencing unprecedented growth, it is hardly surprising that the market may to some extent underestimate the fact of any crisis. We should also not underestimate the outflow of money in cryptocurrencies, which obviously provide better liquidity, not to mention the problem of storage, as compared to traditional gold.
The increase in the value of dollar (8% in 2021) and, finally, the current increase in interest rates do not influence the price of gold. However, if we follow history, political climate and the accompanying inflation constitute historically sufficient reasons for a positive attitude towards gold. You can read more in the text “Investor during the pandemic“.
What does the real property market look like?
When observing the behaviour of Poles, one can get the impression that they love real property, especially their own – unlike inhabitants of many Western countries, where a large percentage of residents always prefer rental, regardless of the amount of their earnings. In Poland, however, the trend seems to be the opposite. Obviously, this is only one of the factors influencing real property prices in large cities, especially in Warsaw. Our presence in the European Union is also important as well as the openness of institutional investors (funds) to investments in Warsaw. All of this, combined with low (recently) interest rates and relatively high inflation, means that one of the simpler investments, where we can still engage more capital, is buying an apartment (or plot of land). It is believed that real property does not lose its value, and its prices will only increase. However, as the subprime crisis has shown us, it does not seem to be entirely the case, as presented in the chart below.
As shown in the chart, between the years 2007 and 2013, the trend was downward – a slight decrease, but still. In the long run, of course, investment in real property has yielded high returns. The trend is unlikely to change in the foreseeable future, given the significant increases in the price of raw materials such as steel or concrete and the significant demand for apartments driven by fear of inflation. Moreover, we still believe that real property prices in Warsaw have their potential as compared to the prices of real property in other EU capitals today. It is presented in the chart below. Note! The chart does not show the prices of apartments (because the prices of apartments in Warsaw are on average 46.18% lower than the prices of apartments in the EU). The chart below shows how much our portfolio has increased if we invested it in real property on the Vistula River, versus real property in the EU or in Switzerland.
The analysis also indicates that an investment in real property in Poland would generate significant benefit, but not as spectacular as in gold. It is also difficult to assess what influenced such a significant fluctuation between the years 2005 and 2007. It might have been a market correction, where prices of apartments were slightly overheated in the initial period (2005).
Is it worth investing in dollars?
Finally, as a curiosity, we present an unfortunate investment in the US dollar. According to the analysis, in the perspective of 20 years, it would be considered as a failed investment. However, in the analysed period, there were also years in which the return on purchasing the dollar would be extremely high. A good example may be the year 2009 when the increase, as compared to the previous year, reached 43.1%. However, this result was probably caused by a strong depreciation of the Polish zloty in the following year, i.e. 2009 (the situation was similar in the case of other currencies such as the euro or the franc). One of the reasons for such a situation was the rapid outflow of funds from the Polish market due to the crisis of Western Europe, in Poland there was a decrease in foreign investments after the crisis in 2008.
As we can see, a significant increase could have been achieved by investing during the crisis in 2008, but the dollar as a long-term investment seems to be a bad idea. When buying dollars for PLN 1 M in 2001, we would make a loss not only due to inflation but due to the mere decrease in the value of dollar (or strengthening of the Polish zloty), which results in the fact that the potential portfolio in this currency today is being less profitable than 20 years ago. Such an investment would make sense facing a significant decrease in the value of the Polish zloty, and as history shows, for the last 20 years Poland has been dynamically developing and the country has been strengthening its economic position. Let us summarise here how the investments discussed are illustrated in the comparative chart. The comment seems obvious.
Despite the escalation of the threat, Ukraine seems to be the least concerned about the situation that is happening right next door. On the other hand, the involvement in publicizing the topic by the Western media, in particular the American, is important. You can see the reactions in the stock markets. It resembles a bit the reaction of the markets to information about Coronavirus. But now there are slightly different conditions, because apart from Putin we have a bit inflated economy, rising inflation, so any possible decreases may have long-lasting effects. Certainly, they cannot be excluded completely. Perhaps investing in conservative instruments is the right thing to do now?