The monthly magazine providing news analysis and professional research for the discerning private investor/landlord

Historic Ratios Continue to Tell us Which Direction Asset Prices Will Move

Peter Hemple makes some early predictions for asset prices like property and gold in 2018

Our annual assessment of the historic ratios between the price of oil, gold, London property, UK property and the FTSE 100 has so far proved to be a very profitable guide to the performance of those assets in the following year. At the beginning of 2016 it indicated that the most out of kilter ratio was between gold (too expensive) and oil (too cheap). Had an investor taken an unleveraged position of going short on the gold price and long on the oil price, they would have made a net return of just over 57% in the following 11 months.

At the start of this year, we reported that the most of kilter ratio (prices on 31/12/16) was London property (too expensive) and oil (still too cheap). As stated in our January issue of PIN however, it does not pay to ‘go short’ on London property, especially now that the re-entry costs (mainly stamp duty) are so high for investors. What I suggested at the start of this year was that a landlord with London property might want to consider re-mortgaging one of their London properties to the equivalent of 25% of that properties value and then use that money to buy Brent crude to the same value of the London property (on trading sites like ig.com), thereby leveraging the trade by four times.

The reason for making this claim was simple. The ratio between London property (priced in thousands of pounds) compared to the price of oil was 8.3 at the start of this year, compared to a 20-year average of 4.7. This ratio had only gone over 8.0 just three times in the previous 20 years and on each occasion it had reverted back below 8.0 within 12 months.

So how profitable was that trade this year? Well firstly, the oil price did not dip by close to 25% this year so there would have been no danger of a ‘margin call’ on the trade, where further funds would be required to keep the position going. Also, as predicted, London property prices have begun to weaken, albeit very slowly. 

Want the full article?