Yesterday I noticed that the price of gold has risen to $1600 per ounce, and the thought struck me that land in my part of west Alabama is selling for approximately the same price per acre. I posed the question to two local business owners whether they would rather own an ounce of gold or an acre of land. Both men responded that they would rather own land. This is an intriguing question about investing and value.
Full disclosure, I am not a research economist, an analyst, or an investment advisor; I am a real estate agent that specializes in selling rural land, so here is how I approach the answer to the question.
The Caprice of Gold
Gold has been a highly prized commodity for several thousand years. Gold matches well with the criteria Aristotle laid out for a good money in that it must be durable, portable, divisible, and have intrinsic value. Gold is a good store of value, and its scarcity has contributed greatly to the desire of people to own it.
From a layman’s perspective the price of gold seems to rise when there is a decrease in the confidence in the strength of our nation’s currency. Gold began its current run up in price in 2001 at $265 per ounce and has climbed to a high this week of $1602 per ounce. That meteoric rise is being touted by experts as a reason for investors to jump into the gold market. I question that logic for 3 reasons:
- Gold is at an all-time high. The real estate market bust that we are in has made me skeptical of buying anything at premium prices. If the market goes south, who is left holding the bag?
- Gold is Capricious. In 1981, the price of gold had been experiencing strong gains, right before the bottom fell out and gold lost 2/3 of its value in one year. It wasn’t until 2006, that gold actually reached the price it had seen 25 years before. For gold to have any value, you must have other people who are willing to agree to the value of your commodity. When an item is assigned great value but has little utility, I am always cautious.
- Gold has a historic bull’s-eye on its back. Feel free to disagree with me on this point, and yes I do know our currency is not tied to the gold standard any longer, but hear me out on this. 1n 1933, President FDR signed an executive order making it illegal for any citizen of the US to own more than $100 worth of gold. It wasn’t until about 1974, that citizens were allowed to own gold again. With the recent spikes in gold prices and the falling value of the dollar, it seems plausible to me that trading of gold could be more heavily regulated with price controls or even stopped if the government decided it was in their best interest. I would simply cite the increased government attention at regulating the speculation buying of oil as support for that argument.
The Utility of Land
I like land as an investment for several reasons.
- Land has utility. I am a function over form guy; you can tell that from my wardrobe, from my vehicle, and what I spend my money on. I believe in investing in land because you can grow food, timber, find water, mine useful substances, shape it, hunt and enjoy it. Land can sustain your life or your livelihood in many ways. Just last week I was talking with a farmer from Iowa who is having his best corn harvest ever at 220 bushels to the acre. That is a staggering amount of corn from an acre of land. Corn is just one of dozens of useful and essential commodities that can be grown on your land.
- Land is historically a sound investment. Most people have heard the old saying, “Buy land, they’re not making any more of it.” Land has a certain degree of scarcity that contributes to its value, like gold and other precious metals. The USDA reported the average cropland price per acre in Alabama in 1997, was $1270. In 2010, the USDA survey shows a $2700 per acre price for cropland in the state. That is a 112% increase in price over the past 14 years, for a nominal rate of return of 8% annually through that period.
- Private land-ownership is essential for our government to function. Local governments across the nation depend on private landownership to stay in business. Each local government appraises real property and assesses ad valorem taxes on landowners. These property taxes are used to fund schools and other essential government functions. It is highly improbable that the right to private landownership would be denied or that vast amounts of land would be taken by imminent domain. Where the government might see a potential threat to its currency in a commodity like gold, private landownership would still be an essential revenue stream for local governments.
- Land equals Opportunity. America has been called “The Land of Opportunity”, and I would say that land equals opportunity. It is exactly because of the historical value and multitude of uses of land that it presents so many opportunities as an investment. You have flexibility (in some types of soil) to grow row crops, or graze cattle, or plant trees based on whatever has the highest rate of return. Land has potential for development and there is always a highest-and-best-use consideration for a property whereas a fixed asset is fixed. Owning land is an avenue to having revenue generating avenues as well as owning an asset that has real value.
John D. Rockefeller is quoted as saying, “The major fortunes in America have been made in land.” I tend to agree with his assertion, after all he managed his wealth successfully. Given the choice between an ounce of gold or an acre of land, I take the land every time.
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