ISIS terror pumps property prices

Could terrorism be good for property prices? The world has subtly changed in the last 6 months, leaving us with a safe-haven vacuum. Is property about to step into the breach?

The tectonic plates of global finance are shifting.

And now everything is topsy-turvey. All the relationships we thought were iron-laws have turned on their heads. It’s an era that seems completely unpredictable.

And the dawn of the post-post-GFC era (I’m sure some witty journalist will come up with a name for it sometime… the Po-Po era?) seemed to catch everyone by surprise.

For example, imagine it’s 1994. Imagine I told you that an unpredictable and passionate fundamentalist Islamic army had emerged in the Middle East, and was cutting a violent swathe through Iraq and Syria.

Imagine that I also told you that at the same time, Russia was fighting a not-so-cold war with one of its neighbours, again in an important energy region. Europe is pissed and introducing sanctions, driving Russia further into bed with China, threatening to completely recast the balance of global power.

What would you expect to happen?

Well if it was 1994 you could bet the house on it. War in the Middle East would automatically feed through into a spike in oil prices. Major political dramas, like we’re seeing unfold now, would spark a rush to safe haven assets like gold. Gold prices would rise.

Over the last 30 or 40 years, gold and oil prices have effectively been a barometer of global peace and stability. Wars, terrorist attacks, even stern words on the political stage were enough to put a spike into oil and gold prices.

You could pretty much set your watch by it.

But not anymore. These are interesting times and the Po-Po era is uncharted waters.

Let’s start with oil prices.

From 2011 til recently, oil has traded in a very narrow range around US$110 a barrel. But then around June this year, around the time the ISIS offensive really took off, prices totally collapsed.

They’ve now fallen below $90 a barrel, for the first time since the end of 2010.

So ISIS is running one of the most media-savvy terror campaigns in history, the world’s seventh-largest oil producer is effectively under siege, and oil prices tanked?!?

You can count on one hand the number of analysts who saw that coming.

It’s pretty much the same story for gold.

Gold’s bull run (one of the most remarkable in any market) came to an end towards the end of 2011. It’s come off quite a way since then, but through most of this year, it looked like Gold had found a floor somewhere around $1300 / oz.

But take a look at the 12-month chart.

In July, gold prices started diving. That’s about the time ‘somebody’ shot down an international passenger plane and everyone started stressing about the Ukrainian crisis.

Gold prices firmed a little in October, but coming into November, prices went into free-fall again.

And yields? Oh wait, that’s right. Gold doesn’t have yields. There no income associated with owning it. It’s only an “asset” in the sense that you can speculate with it.

(ooh. Cheap shot, Jon.)

So what’s going on? Our barometers of peace and stability and pointing to perfectly sunny conditions. But almost exactly the opposite is true.

Has the world gone crazy?

Now it is true that there are some unusual fundamental factors at play in both the oil and gold story.

In terms of oil, it seems that ISIS is just forcing oil through unusual channels. Kurdistan in the north of Iraq normally has to sell oil through Baghdad. But they’re using the conflict to justify selling directly to Turkey – at a bit of a discount.

ISIS are also keen to sell oil from captured territories in order to fund their campaign (do you have any idea how expensive facebook advertising is?). They have no interest in turning the oil taps off.

All that means is that the oil is still flowing, some of it at a discount.

The oil price falls.

The main story in gold of course is the end of Quantitative Easing in the US, which wound up a few weeks ago.

QE was a massive money printing experiment, essentially. Pretty much everyone, following text-book logic, thought that all the money printing (peaking at $85bn a month!) would trash the American dollar.

Gold was the place to store value.

It was a seductive logic, but it just didn’t play out that way. The QE Zeppelin took off (against analysts expectations) flew in the air for a long time (against analysts expectations) and then landed again safely (again, against analysts expectations).

Suddenly, everyone who owns gold isn’t sure what they’re hedging against anymore. They’ve got all this money tied up in an asset that doesn’t generate any income, and whose ‘fair price’ is completely impossible to determine.

Gold is still 3x what it was worth in 2002. Is that reasonable? Who knows?

But whatever’s going on, Oil and Gold are just not the dependable safe-havens they used to be. They’re no longer your go-to guys in times of crisis. This is the new reality in the Po-Po era, and everyone knows it.

But that creates a safe-haven vacuum. Frightened money has to flow somewhere.

So, I’m going to offer the thesis that developed country real estate is the new safe-have of choice.

Since it’s real, and in limited supply (which is what gold has going for it) it’s a natural hedge against inflation.

A stable democracy like Australia also offers a hedge against political instability elsewhere.

And on top of that, it pays an income – in a world where decent returns are increasingly difficult to find.

This is a transition that’s in progress, but the amount of foreign interest in Australian property tells you it’s happening.

And if property becomes the new safe-haven of choice, that means that the next time ISIS launches a media offensive, or some other mad government announces they’re going to start dropping money from helicopters, we should see a spike in house prices.

Terrorism could be good for property prices.

This is the strange, strange world we live in.