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Investment Update

By Marco Pietropoli, 25th January 2011

Consultation

The following is market and economic commentary. This is not general advice that should be acted upon unless you have the appropriate understanding of investments. We recommend that you seek Independent Investment Advice from a regulated professional.

We have had a very good run on our Commodity investments over the last year.  We have recently taken profits on the following investments:

• Physical Gold
• Physical Palladium
• Physical Silver
• Agricultural Commodities
• All Commodities

We took profits at the start of 2011, which would seem to have been good decision.

I feel Commodities in general are a very good investment over the next 2-5 years, but there is increased risk to the downside in the near term. 

The demand from the Emerging Markets is a major factor in the rise of Commodity prices. The lack of credit availability may also hamper investment in further production.

Agricultural Commodities are being forced up due to climate change, fire and floods but world stocks of food have been low for some time.

 Medway Independent Financial Advisor

Crucially we also are seeing competitive devaluation of currencies. Many countries seem to be doing their best to make their currencies worth less relative to the competition.  It is not rocket science, if you devalue money prices have to go up!

In the UK we have inflation starting to gather pace ( click here for further details ).  This is going to make printing of money more difficult (although I'm sure we might have another go at it). The Bank of England will have to raise interest rates soon to retain credibility.

As putting money in the bank is a certain loss in real terms, investors will look at purchasing other assets.  We therefore have created a bubble in Equities, Gilts & Treasuries and Property in many parts of the world.

There is a growing bubble in Precious Metals and we are starting to see growing bubbles in other Commodities.  The problem with the Commodity rally, which accelerated since the announcement of more money printing from the Federal Reserve, it that is has the potential to kill off any economic momentum.

As many forms of paper investments are actively being devalued, rational investors will look to spread the risk. Why is it wrong to protect yourself against inflation? If policy makers refuse to give people a real rate of return in the bank, you will create asset bubbles.

Why is it wrong for a family to purchase a much larger bag of rice the next time they go shopping?  They believe rice prices will rise and they may well increase faster than the interest they receive in the bank. This is a rational choice to ensure the family is properly fed.

Why is it wrong for a company, that needs Commodities to produce products, to bring forward their purchases as they feel prices may go up further and this will affect their profitability?  Pension funds must also be allowed to protect their members from inflation.

In a few months it is probable that we will see politicians, who haven't got a clue, blaming evil "speculators" for driving up the price of Commodities. 

We have also recently further extended our FTSE 100 Short positions.  I like to think I will get one more chance to extend my FTSE 100 Short before we get the proper sell-off.

I am using the Dollar Index as one of my main guides at present.  The next move will be to buy more Commodities as they re-correct downwards.  This will be when the Dollar is at the top end of its range. We will also be considering some Equity purchases at this point. Equities can still fall if the Dollar is falling, so you need to be careful and selective.

In the longer term, the worrying issue is that the Dollar Index is trading in a narrowing range. Within 3-5 years this trend will end and there will have to be a breakout in one direction or the other. My bet is that it will be down, as the days of the Dollar as the global reserve currency are numbered. The main problem is that there is no currency to replace it at present.

We will need to work out a totally new financial system if no currency wants to be the reserve. I believe that stability in the financial markets may only be achieved once a new and more stable system, not based on the Dollar, is implemented. This may well take years to negotiate. Continued market volatility will focus the minds of policy makers, but it may take them some time to figure something out.