Inflation vs Deflation

This is the hot debate in the investment community.

Deflation would favour fixed income investments and cash. Inflation would favour commodities, precious metals and resource related stocks.

For the UK I think inflation will be the problem. Our deficit as a % of GDP is one of the highest in the world, and even if the Conservative government push through all these spending cuts our deficit as a % of GDP will still be on a very unsustainable path. For the Eurozone I think deflation will be more of a problem because of the lack of any quantitative easing and the Eurozone’s inflexible exchange rate.

Compared to the size of our money supply the UK’s quantitative easing program was massive, larger than that of the US in relative terms. This only spells one thing, inflation.

There are few options remaining in order to solve this mess for the UK- we could default on our debt, we could inflate our debt away or we could depreciate our currency so that our debt commitments are worth less to foreign holders. I think we will see a combination of inflation along with a depreciating currency which means we will be importing inflation too!

To protect yourself from weakening sterling it would be wise to put some money in strong currencies- these include Norwegian Krone, Swiss Francs and the Australian Dollar. Exposure could be gained through foreign currency denominated accounts with high street banks, ETF’s, foreign denominated assets or simply holding foreign cash.


Gold and Silver

Everyone is talking about gold and silver at the moment, and whether or not they are in a bubble.

Ultimately people invest in precious metals as protection against inflation, protection against fiat currencies and protection from the government. At the moment it appears there is still a long way for the bull market to run as the markets have not gone parabolic.

Silver has had a brilliant run, reaching $49.50 per troy ounce at the end of April. I think there will be some consolidation around this price as silver has had a brilliant run, it however remains a hold for the long term.

If you want to invest in precious metals take a look at buying shares in LON:PHAU and LON:PHAG. These ETFs are backed by physical metals so they will closely match the value of the underlying metal. Remember they are denominated in USD though, so you may be exposing yourself to currency risk depending on what currency your liabilities sit in.

I will talk about owning precious metals in the form of bullion/ coins in a later post.