What does China know? + Australian housing value shock

Hi everyone,

I’ve had a busy but rewarding week speaking at events across the Gold Coast, Brisbane, and Adelaide to local government councillors, travel operators, and retirees. It was great catching up with so many people and chatting about all things business and finance!

A common theme - whether I’ve been speaking with retirees or business owners - is that costs just keep rising. This Wednesday’s release of the September quarter CPI will be an important one, with big ramifications for interest rates.

In this week’s newsletter:

• What’s causing the gold spike?

• Superannuation has become the financial superpower of Australians.

• The deadline is fast approaching for self-lodged tax returns.

• Australian residential property prices compared with the rest of the world.

• If you think AI is a fad … you’re wrong. It's growth is bigger than the internet.

• How to build your investment pyramid.

What’s causing the gold spike?

The price of gold continued to surge this week at $US 4,300 an ounce, then fell 7 per cent on overseas markets on Wednesday morning.

In a recent newsletter, I explained that the price of gold tends to rise during times of political and economic uncertainty, as investors turn to it as a safe store of value. I also cautioned that at current levels, gold could be volatile - and that seeing queues of investors outside bullion dealers might be a sign the market is nearing its peak.

The flight to safety is understandable as the often-erratic behaviour of President Trump can spook markets. But I thought the following charts also add more explanation.

Exchange Traded Funds (ETFs) are now enormously popular with investors and they offer a range of opportunities to invest in listed gold miners, gold futures and actual physical gold. Because they are a managed fund type of investment, they have low administration fees and are convenient.

Take a look at the huge amount of money in the first chart below that’s been invested in gold through managed accounts over the past month, compared with the last ten years. It’s all adding to demand for gold and driving price momentum.

Last week I also discussed that central banks were buying up big when it comes to gold to underpin their national reserves. But have a look at China in the below chart. Its gold stock levels have had an unprecedented surge to extraordinary levels.

The rise in Chinese gold holdings has been so dramatic that financial markets are asking what they might know that the rest of us don’t. You could be forgiven for suspecting that China is preparing for some sort of global financial crisis ...

While all the attention has been on gold, its less glamorous sibling - silver - has also been quietly surging in value to record highs … levels not seen since the infamous Hunt brothers tried to corner and manipulate the silver market in 1980, and during the GFC in 2011.

Superannuation is the financial superpower of Australians

I know you’re sick of hearing me laud the policies of former Federal Treasurer Paul Keating and, in particular, his introduction of compulsory superannuation. This national savings scheme continues to underpin our economic prosperity and one of the reasons why average Australians are the second wealthiest in the world.

There is $4.2 trillion invested in superannuation which means 48 per cent of Australia's gross financial assets are invested in insurance and superannuation. That’s almost double the global average.

And in terms of average financial assets (excluding property) Australians have jumped from from tenth position to the third in the world.

The deadline is quickly approaching for self-lodging tax returns

Next Friday 31 October is the deadline for Australians to lodge their tax return for the 2024/25 financial year or, alternatively, you can appoint a tax agent and get an extension.

Over 60 per cent of Australians use a tax agent which means their deadline for lodging a return is either 31 March or 15 May next year.

A tax agent’s expert knowledge can help you complete your return while staying within the ATO’s guidelines and avoid potentially costly mistakes - plus their fee is tax deductible the following year.

Anyone who plans to self-lodge before 31 October should remember these three golden rules when it comes to tax deductions:

1. You need to have paid or been charged the expense: If you have been reimbursed for the expense or someone else paid the expense, you cannot claim a deduction.

2. You need to have proof of the expense: It helps to have copies of tax invoices.

3. You need to ensure that it is a work expense: The deduction cannot be for expenses that are used for private or capital purposes. You need to apportion expenses to ensure that only the work component is claimed, not the private or capital component.

Australian residential property prices in perspective

I’ve talked a lot about Australian property prices but just how do they compare with overseas markets? I know every market is different but a comparison does bring some perspective.

The below chart from the Organisation for Economic Co-operation and Development (OECD) shows that from an affordability perspective, Australian property is expensive. The OECD does this by comparing income/wages to the cost of buying a property.

In the 20 years up until the year 2000, Australian property, from an affordability basis, was tracking pretty well in line with the rest of the world. But in the last 25 years, Australia and Canada have seen a surge in values, and incomes haven’t kept up.

It is harder in both countries for buyers to have the necessary income to buy a property.

On a city basis, property giant Ray White has produced a report showing Sydney remains one of the most expensive housing markets on the planet, but the bigger story from this year’s Demographia International Housing Affordability Report may be what’s happening further south.

Adelaide, long regarded as Australia’s “affordable capital”, is now the second least affordable city in the country, with housing costs rising far faster than local incomes.

The latest report continues to rank Sydney as the world’s second least affordable housing market, behind only Hong Kong. Sydney’s median house price is now 13.8 times the median household income - what Demographia calls “impossibly unaffordable”.

Adelaide’s median multiple has climbed to 10.9, pushing it past Melbourne (9.7) and Brisbane (9.3).

In global terms, all five of Australia’s major cities fall into the report’s highest category of . Surprisingly, Perth - where prices have risen rapidly over the past four years - is now the most affordable of the group, sitting at 8.3 times income.

High wages go some way to explaining why Perth remains relatively more affordable, although it is still well above the international benchmark of 3.0, which Demographia considers “affordable”.

The report highlights a sharp turnaround for Adelaide. Just a few years ago, the city’s housing market was among the most accessible in the country. But strong price growth has pushed affordability to record lows. Prices have risen by 9.1 per cent, outpacing both Melbourne and Sydney. Australia’s national median multiple is 9.7 - worse than Canada (5.4), the UK (5.6) or the US (4.8).

On this measure, Australia’s housing is less affordable than virtually any other high-income nation.

While limits on urban expansion play a role, local resistance to higher density housing is likely a more pressing constraint as is the desire of Australians for large homes. At the same time, a sharp rise in construction costs since the pandemic has made new projects harder to deliver, compounding the affordability challenge.

The affordability squeeze is unlikely to improve soon. September data shows national house prices are up 8.9 per cent over the year - and are on track to reach double-digit annual growth by December.

Any further Reserve Bank rate cuts will fuel stronger growth, while generous first-home buyer incentives are driving sharp gains at the cheaper end of the market. New housing supply continues to lag well behind target, with little improvement over the past year.

If you think AI is a fad … you’re wrong

It’s hard to believe the internet became widely available to the public in the mid-1990s with the release of the World Wide Web in April 1993. That’s not that long ago for a technological advance that revolutionised the world.

Remember the screeching sound of those early dial-up modems?! I’m old enough to remember the fax machine and before that, the ticker-tape. Gee, I’m old. My eldest daughter is 45 and was born on the day of the start of the longest strike in the history of Australian journalism … over the introduction of computers.

Enough of the reminiscing. My point is, when it was introduced, we thought the internet was a fad. It wasn’t. It revolutionised the world.

AI will bring a similar, if not greater, revolution. And we all have to understand its uses.

Take a look at the chart below. It shows that AI adoption in just 2.5 years has matched what the internet took 13 years to achieve:

How to build your investment pyramid

As the bull run on global sharemarkets accelerates unabated, investors continue to pile in with a herd-like mentality. With this heady rush, I think it’s a good time to remind sharemarket investors of one of the common pitfalls in times like these: over-speculation.

As we’ve witnessed once again, the flow of funds has supercharged dividend-paying stocks, then swung into strong growth stories, and has now inevitably moved to the small end of town - the speculative stocks.

The big run-up in the price and activity of small gold explorers is a classic example of this, driven by the surge in the gold price. It’s easy to see the attraction - one good upgrade by an explorer can send a share price rocketing.

But be warned: when financiers and friends of friends start spruiking small stocks as the next big thing, it often signals an imminent market slide.

The prospect of huge gains is exciting, and sometimes just the chance that your mate - or some paid broking report - might be right is enough to take a punt. But in reality, the odds of a windfall gain on a speculative stock are often no better than buying a lottery ticket.

That’s why I rarely speculate. Of course, that also reflects my age, risk profile, and personal circumstances. There is, however, room for higher risk-reward stocks in a well-balanced portfolio - the key is constructing your portfolio wisely from the outset.

What exactly does that mean?

A well-balanced portfolio can be thought of as a pyramid. Starting construction work from the bottom, the base needs to be made of solid stuff. In the share market this means established, cash generating businesses with a sustainable competitive advantage. Almost the exact opposite profile of speculative stocks.

They don’t run up as hard as others in the good times, but don’t slide as hard on the way down either, and in a lot of cases outperform the wider economy.

I’m talking about healthcare, consumer staples, like food, beverages and other household items, and telecommunications. Think CSL, Woolworths and Telstra - traditionally strong stocks in traditionally strong sectors - which pay strong dividend yields.

These types of core stocks will make up the biggest portion of your investment pyramid - anywhere up to about 60 per cent of the whole structure, depending on age and appetite for risk. Only once that base is in place can you start building on it with some growth companies.

These are cash-generating outfits that have room in their industry and business for expansion. They can’t be pegged to a specific industry, but more thought of as a link between the core and speculative stocks that will make up the tip of the pyramid.

These growth stocks might make up 30-40 per cent of the portfolio. And for me, that’s as pointy as my pyramid gets.

But given the solid structure underpinning the pyramid, there is room for anywhere up to 10 per cent of the portfolio to be invested in speculative stocks. Essentially this is money that you can afford to lose, like a lottery ticket.

Throughout the process of building the portfolio pyramid it’s also important to consider diversifying your investment risks. This means ensuring you don’t have too much exposure to one particular industry, technology, economy or resource.

Of course professional advice is important in any responsible approach to investing too but, as you can see here, just as important is common sense. It’s amazing how many people still put all their investment eggs in one basket, or buy a bunch of businesses that don’t make any money.

Following these simple principles, building a well-balanced portfolio that diversifies risk, will help to eliminate the temptation for speculation.

Because what’s less considered in bull markets (which we’re in now), is that things can get clawed back just as quickly the other way - and it’s the speculative stocks that fall the fastest.

According to my friend’s advice, a market pullback could happen at any time.