When gold was going for $300 an ounce and oil for $25 a barrel, it was easy to know where to put your money.
The fast growth of the emerging world made it clear that demand for commodities of every kind was going to soar and a quick look at pretty much any part of this sector – whether precious metals or palm oil – left little doubt that supply wasn’t going to be there to meet it.
So I started being bullish on precious metals, industrial metals and any kind of fossil fuel seven years ago.
Then, three years ago, I started my love affair with soft commodities as I began to understand how people’s eating habits would change as incomes rise and, of course, as global governments decided that biofuels were the silver bullet that would kill off global warming.
Over the same period of time, it seemed obvious that the housing bubble and the consumer boom it was driving couldn’t go on for ever, something that would hit growth in the west hard.
I was far too early with much of this (I started trying to sell my own flat in 2003 – luckily no one bought it until mid-2007).
But still, when the time came, I wasn’t holding any houses, housebuilders, commercial property or retail stocks, either here or in the US. I’ve been very clear on all sorts of other things, too.
Sometimes, I’ve been right (recommending investing in Brazil for example) and sometimes completely wrong (buying uranium just as it tanked). But the point is this: it has been an easy time to have big opinions and I’ve had lots of them.
That’s not the case any more.
Sure, I still wouldn’t touch anything to do with property or western consumption with a bargepole. That bit is easy. And I wouldn’t buy most physical commodities right now, either – as oil starts to pull back from its mini bubble, other things will too.
On the other hand, I remain convinced that the commodities supercycle has many years to run as the Chinese and the Indians keep buying cars and building highways. Not being a trader, I’m not prepared to sell all my long term holdings in big oil and mining shares, either.
Then, there are stock markets themselves. Look at the numbers in isolation and they seem pretty cheap: the FTSE 100 trades on a price/earnings (p/e) ratio of a mere 11.5 times and yields 4.5 per cent.
That’s not bad. Until you think about how bad the economy might get as house prices keep falling, consumers stop spending and unemployment rises. If that means earnings don’t rise, 11.5 times is a high price to pay for equities. And then there’s inflation – now rampant everywhere.
There is an idea that equities are a good thing to hold in inflationary times – because they are a “real” asset they are supposed to hold their value. But it didn’t quite work out like that in the 1970s.
Instead, according to Barclays Capital, between 1969 and 1979 the average annual real return for UK equities was -2.3 per cent.
That’s better than bonds, but not exactly the kind of return that would have you rushing out to put your name on the list for one of Burberry’s £11,000 alligator skin handbags.
Thinking about inflation is confusing too: will prices still be rising next year?
Five years ago, it was easy to place your bets on inflation. Interest rates were low, money supply was rising far too fast around the world, commodity prices were beginning to break out, and it was already clear that the prices of jeans and DVD players imported from China couldn’t actually fall indefinitely.
So the fact that inflation is on the up everywhere shouldn’t come as too much of a surprise.
But if – as I think we can expect – the credit crunch really gathers pace and recession takes hold might we not see the return of deflation instead?
Société Générale’s number one bear Albert Edwards thinks so. He’s expecting the next few years to offer us a sample of Japanese-style deflation accompanied by a brutal bear market. Nasty.
I think I’m more inclined to expect stagflation than deflation, given how entrenched easy money policies are in the US. But, either way, there doesn’t seem to be a good reason to buy much in the way of western equities.
Now the good news. My ongoing confusion about the current state of our markets tells me one simple thing – that I should hang on to my gold.
The price of gold has already fallen 14 per cent since its peak of $1,033 back in March, and it also had a bad week as the dollar rose.
But, in uncertain environments, what we all need most is insurance. And gold is the best financial insurance you can get over the long term.
There is a perfectly reasonable fundamental case to be made for holding gold: supply is limited and demand high. However, the real point is that the future is very uncertain and not in a good way.
We could see an inflationary recession. We could see a deflationary recession. But what I think we can be pretty sure we won’t see, over the next few years, is stable growth with stable prices.
Tim Price of PFG Wealth puts the case nicely. “There are few things you can count on in a full-blown economic and financial crisis,” he says.
“Not central banks, politicians or Wall Street banks, and not paper currencies – the dollar lost 98 per cent of its purchasing power during the 20th century.”
“But several thousand years of world history point to an alternative store of value, in the form of this iconic, shiny yellow metal, whose very scarcity is its abiding strength.”
You can get exposure to said iconic metal by buying the ETFS Physical Gold ETF (PHAU).
First published in the Financial Times