Contact us on 086 111 7625 or info@rockcapital.co.za
We traded short on the ZAR vs. USD, thus if one looks at the attached graph we want the graph to move upwards.....
We used this trade as a hedge on our offshore portfolios and did not apply any gearing - for example if your portfolio is 125 000 USD, we only hedge 125 000 USD/ZAR. The return on this trade to date is 1% for the week (since opened).
http://www.rte.ie/news/2011/0718/gold-business.html
Updated: 09:55, Monday, 18 July 2011
The price of gold surged this morning above $1,600 per ounce for the first time in history.
The price of gold surged this morning above $1,600 per ounce for the first time in history, as investors bought the safe-haven metal amid deepening worries over the euro zone debt crisis.
Gold jumped as high as $1,600.10 an ounce in early morning trading on the London Bullion Market, as the precious metal extended its recent record-breaking surge which began on Friday.
This week, euro zone countries will seek to settle their debt crisis at an emergency summit to try and stop Greece toppling into default and dragging bigger euro economies into deeper trouble.
EU president Herman Van Rompuy has said the summit in Brussels on July 21 would focus on both the financial stability of the eurozone and future financing of the Greek programme.
Meanwhile, US politicians are wrangling over a deficit reduction plan which would allow President Barack Obama to avert a potentially catastrophic debt default in return for $1.5 trillion in spending cuts.
Markets has slid last week as the euro zone debt crisis, which has already sunk Greece, Ireland and Portugal, showed signs of spreading to Italy and Spain.
The European Union announced late on Friday that only eight of 91 European banks had failed so-called 'stress tests' which were designed to assess their ability to withstand a worst-case economic scenario.
A ninth bank, Germany's Helaba, said it had failed according to the EBA's standards but passed on its own calculation.
A number of my friends have recently bought properties and I find myself having to explain why I choose not to own the flat that I live in. You see, I’m one of those people who choose to rent and today’s Angle looks at the decision purely from an investment perspective.
Which will give me the better overall return, to pay off a mortgage on my current flat or to rent it and invest the difference available in the equity market?
To answer this question will require a number of assumptions so please bear with me whilst we look at a few important issues.
House price returns
First and foremost: what return can one expect from house prices? The longest property index that I’m aware of is the “The Herengracht Index”, constructed by Prof. Piet Eichholtz[1]. This index tracks the transaction values of buildings along the Herengracht, a canal in Amsterdam, starting in 1628. In his paper, Prof. Eichholtz estimates that the real (in excess of inflation) return of the Herengracht Index from 1628 to 1973 was 0.45% p.a.
Prof. Robert Shiller publishes an index of house prices in the United States of America. In his book, Irrational Exuberance[2], Prof Shiller shows a graph of the real house prices since 1890. This index is updated on his website, www.irrationalexuberance.com. At present, the index suggests that USA house prices have increased by an annual real rate of 0.14% since 1890. If we only focus on the period since 1966, the real return was 0.18% p.a.
In South Africa, we can look at the Absa House Price Index. This index only goes back to 1966 but suggests that South African house prices have increased by a real amount of 1.5% p.a. over this period.
Based on the above, I think that assuming that house prices in South Africa increase at a rate of 1.5% p.a. in real terms is a fair, if not aggressive, assumption.
Mortgages
Since we are looking at the long term average returns, I will also focus on the long term average mortgage interest rates. The prime lending rate in South Africa has averaged 14% since 1966. Over the same period, inflation has averaged 9.3%.
If we assume that the bankers will like me and offer me 1% below prime, I should be able to borrow at an average of 13% over a 25 year period. For the purposes of our exercise, let us also assume that my friendly banker would require me to put down a deposit equal to 15% of the purchase price.Property Costs
Let us further assume that the value of the (modest) home I am renting is R1.7million and that its market-related rental is R8 000pm with annual increases linked to the value of the property.
Property ownership costs
In buying, owning and selling a property, one will incur many costs. A quick bit of research suggests that the cost involved in purchasing a property lies in the order of R40 000. This covers the cost to register a bond and to conduct the transfer, but not the actual transfer duty which is calculated according to the purchase price of the property. I estimate the ongoing costs of ownership in the order of 1.7% of the property value per year. This would cover insurance, levies, maintenance, rates and taxes.
When one ultimately sells the property one inevitably incurs agents commission (in the order of 5.5% to 7.5% + VAT) and capital gains tax on any growth above the R1.5 million concession offered by SARS.
The equity market
My alternative to a property purchase is an investment in the South African equity market.
Over this same period starting in 1966, the JSE All Share Index has delivered an annual return (including dividends) of 8% in real terms. So, allowing for some generous asset management and other transaction fees, let us assume that the return that one can earn over the long-term from an equity investment would be inflation plus 6%.
A model of investment return
Right, those are the assumptions. Now let us look back to the initial question: Which will give me the better overall return, to pay off a mortgage on my current home or to rent it and invest any surplus funds in the equity market?
If I rent, I can invest the money I would have to have disbursed as a deposit and in respect of the initial property costs on Day One and can add to the investment for so long as the rental costs are below the monthly mortgage payment. This will require some financial discipline. If rents increase to a level higher than the mortgage payment, I will fund the difference out of the returns the investment generates.
At a current rent of R8 000 per month, the rental yield on the property is some 5.7% p.a.
This chart below shows the net value of an investment in the equity market, compared to the value of my flat if I were to sell both investments at different stages over the period of the mortgage.
According to the model that I built on these assumptions, I will be in a better position in 25 years by renting this property. In fact, by the time that I have settled the mortgage, I will have some R3.2million more than what I could realise selling the flat.
Do note that this calculation is particularly sensitive to the rental yield that I start with. My model suggests that as long as I can rent for a yield of below 6%, I will be in a better position by renting rather than buying.
For those who would like to construct their own model, here are all my assumptions:
I will assume the following for the alternative investment
Some elements that I have excluded:
