Mexican Stocks, Silver, and Real Estate--A Ten Year Review
The Consumer Price Indexes (CPI) program of the US Department of Labor produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services in the United States. Tracking the CPI data began in 1913 and by 1983, inflation had reached 100%. Therefore, today most all data is calculated using a 1983 base of 100. For example, a CPI of 215.3 in 2009 indicates 115.3% inflation since 1983. Below is the inflation calculator based on data provided by the U.S. Department of Labor Bureau of Labor Statistics showing inflation during the past decade:
The above calculator shows that if you put $100 under your mattress ten years ago it, through the inflation of goods and services during the past decade, it would be worth $76 ($100/1.32) today, i.e., worth 76% of its original value or a loss of 24% in terms of 1998 purchasing power.
In order to hedge against inflation, many advisors suggest that you buy various commodities, oil and gas, foreign dollars, Real Estate Investment Trusts (REITS), Treasury Inflation-Protected Securities (TIPS), gold, and silver, etc. All of these investment vehicles are now available through Exchange Traded Funds (ETF’s) where you don’t have to take physical possession of the commodities; for relatively small investments, gold and silver in the form of bullion or coins is readily available and simple to purchase and hold. All of these forms of hedges against inflation can be excellent, however for the purpose of this article, we’ll concentrate on silver.
Silver has always been one of Mexico’s major export materials; in fact, until just a few years ago, Mexico was the largest producer and exporter of silver in the world. Let’s assume ten years ago, instead of putting your $100 under the mattress, you bought $100 worth of silver selling at approximately $5.50/ounce. Today, at $16.65/ounce, you can sell your silver and enjoy a gain of more than 200%, i.e., your $100 investment is now worth $303 resulting in a 1999 purchasing power of $230 (76% of $303); not bad! If you’re concerned that the recent increase in silver prices is only a temporary spike, it should be known that silver was selling at $20/ounce in 1981 and when the Hunt brothers were speculating in 1980, it was driven up to over $50/ounce; now that was a spike! The last time silver was selling for $16.65/ounce was in 1981. Taking the CPI inflation index of 2.37 (1981 to 2009) into consideration, $16.65/ounce in 1981 was equivalent to almost $40/ounce (2.37 X $16.65) in today’s money and therefore it’s not too difficult to imagine a much further increase in silver prices! This logic is further reinforced when you take into consideration the weakening dollar forecasted for the near future.
The world’s leading miner and producer of silver is the Pan American Silver Corp. (PAAS), headquartered in Vancouver, B.C. This publically traded company has silver mines throughout Latin America with a couple of its largest mines in Mexico. In fact, one of these two mines is their only open pit mine and the other huge Mexican mine, located north east of Puerto Vallarta, has been producing the purest silver of all their mines since 1929. The graph below reveals the PAAS stock performance during the past ten years.
Next, let’s analyze the performance of the US stock market during the same ten year time frame. If your $100 had been invested in SPY, the S&P 500 ETF, it would be worth 80 dollars today per the graph below. Let’s take it a step further and adjust for inflation; that $80 would have only $61 (76% of $80) of 1999 purchasing power. Yes, that’s correct; if you were invested in the US stock market and your return was better than average, you’ve lost almost 40% of the purchasing power that you had ten years ago!
Now, let’s compare the ten year performance of the Mexican stock market (Bolsa) to the US stock market. If you had purchased EWW, the ETF basket of Mexican stocks, in 1999, you would have realized a 150% gain and your initial investment would now be valued at $250, with a 1999 purchasing power of $190 (76% of $250); pretty decent, especially when you compare it to the $61 left from investing in the SPY’s!
Review the graph below and you’ll immediately see how much the ETF basket of Mexican stocks (EWW) and the Pan American Silver Corp. (PAAS) stock had appreciated in value through 2007 and then fell precipitously in the second half of 2008. More importantly, you can see how both are recovering beautifully as the world recovers from the global recession. Comparing both of these Mexico related stocks to the SPY’s; you may never again want to invest your $100 in a US related stock! Assuming that the global economy continues its gradual recovery, it seems quite apparent from extrapolating the curves below that Mexican stocks and silver are very attractive areas for investing a portion of your portfolio at this time. It’s amazing to see how closely the EWW and the PAAS stock prices have correlated over the past decade!
Finally, let’s look at Mexican real estate. Along the prime region of the Mexican Riviera, property values have tripled from 1999 to 2008 (we don’t have any empirical data but after being invested in the real estate market in Puerto Vallarta for more than a quarter of a century, we can state it as a fact; some properties have quadrupled in value!), after which they have remained flat to perhaps dropping by as much as 20%. Therefore, a real estate investment of $100 in 1999 was worth about $300 in 2008. Assuming a depreciation of $60 (20% of $300) over the past 18 months, it’s now worth $240. In terms of 1999 purchasing power, it’s worth $182 (76% of $240); about the same as EWW and PAAS, not as much as silver, but a whole lot more fun than owning either! When comparing these facts and figures to the $61 of 1999 purchasing power remaining from the $100 invested in the SPY’s, it’s truly disheartening to think of those of you that were fully invested through IRA’s or 401k’s during the past decade. Fortunately, it’s not too late to recoup your losses; in fact, the time could never be better!
The recent drop in Mexican real estate values was caused mainly by the global recession; however, the recent border town drug cartel war news (1,200 miles between PV and Juarez!) and the swine flu scare (three confirmed cases in PV!) contributed significantly to the local real estate recession. The border town drug cartel war and the swine flu scare effects will vanish over time and in all probability, the property values will soon recover to their 2008 highs. Unlike the 20% property value drop in the US, there are virtually no foreclosures dragging down the housing values in Mexico. The housing crisis in the US will probably continue for a couple more years resulting in further erosion of home values by an additional 10-20%. Currently, millions of Real Estate Owned (REO-lender owned) properties exist in the US but you won’t find any in Mexico!
In summarizing, $100 placed under the mattress ten years ago has a 1999 value of $76 today, $61 if in the S&P 500 SPY’s, $230 if in silver, $190 if in the Mexican EWW fund, $185 if in the silver company PAAS, and $182 if in Mexican real estate. Regardless of where in Mexico you had invested your $100 ten years ago, whether it was in Mexican silver, stocks, or real estate, you’ve now got at least three times as much as you would have had if you had invested in the S&P 500 SPY’s! So, here we are in 2009; the question is where best to invest your remaining money after the fiasco of the past decade? With real estate prices 20% off recent highs, long term mortgages of 50% (or more) available in Mexico, and many developers willing to short term finance up to 50%, there has never been a better time to invest in Mexican real estate.
Why hesitate; isn’t it about time that you at least consider making an investment decision totally contrary to those recommendations that you’ve been receiving from your personal financial “guru” that have cost you 40% of your life’s savings? Come on down and retire in Mexico; maybe you’ll even want to buy a bag full of Mexican Libertads or dabble in the Mexican Bolsa through a vehicle such as the EWW fund while enjoying retirement to its fullest! Who knows; as you’re relaxing in your beach front condo on the Mexican Riviera, perhaps your investments in Mexico will gain enough over the next couple of years to recover what you’ve lost during the past decade!
Jan, 2011 Addendum to Original Article dated September 1, 2009
After revisiting the above article which was written in September, 2009, we decided to review the actual performance of EWW, the Mexican ETF of stocks as well as PAAS, The Pan American Silver Company. In the 8th paragraph of the original article, you'll see the following words: "Assuming that the global economy continues its gradual recovery, it seems quite apparent from extrapolating the curves below that Mexican stocks and silver are very attractive areas for investing a portion of your portfolio at this time."
The graph below is merely an extension of the graph prepared 16 months earlier; it's quite obvious that both the EWW and PAAS performed exceptionally well since the article was written. We certainly hope that you followed that free advice given in 2009 but tend to doubt it!
Giving you the benefit of the doubt, let’s assume you followed that advice and invested a small portion of your portfolio in Pan American Silver Corp on the day the article was published. The chart below shows that you gained a handsome 120% profit on your 16 month investment, not bad, huh? However, being the conservative investors that most of us are, instead of gambling on some 3rd world country or unknown silver company, you probably put a portion of your investment funds back in the S&P 500 and are thrilled with your 25% gain during the past 16 months. Congratulations, you’ve joined the masses and, discounting inflation and dismissing investment advisor fees, you’re back to where you started 12 years ago!
Finally and perhaps most importantly, in the original article, we dedicated the last 4 paragraphs to real estate values in Mexico. During the past 16 months since the article was written, we have witnessed the collapse of the real estate market in Puerto Vallarta. We are experiencing a triple whammy with the massive overbuilding, the global recession, and the border town drug cartel scare. Consequently, property values have hit rock bottom with the owners/sellers, speculators, and developers competing with each other. That being said, it’s probably safe to say that most all of the paper gains that have accrued during the past decade have been virtually wiped out. Fortunately for the sellers, they have essentially no mortgages and therefore foreclosures are nonexistent; consequently, they are unwilling to sell below their cost and the bottom has been firmly established.
For those of you that sat on the sidelines and allowed the Mexican stock market and the price of silver to rebound without your participation, perhaps this is your opportunity take advantage of the Mexican resort real estate market. If you ever considered owning a Mexican retirement property, you’ll never find a better opportunity and location to make this investment than today in Vallarta. Prices are not going any lower and when the global economy recovers, it’s our belief that purchasing one of these beautiful retirement condos in Paradise, at or near the cost of construction, will become the investment of a lifetime.
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