Financial Perspectives

In eras of normal economic activity there are always rumours that come true. That interest rates will fall (or rise), that the chancellor is on his way out (or not) and so on. However, it’s more of a problem in times like these.

For example, the West Bromwich building society was rumoured to be about to need a rescue package back in May. In fact, that hasn’t happened and may never happen, yet I’m quite sure that more than a few depositors with the society withdrew cash whilst other potential depositors probably decided on a different building society. So far that’s been “a few” depositors or potential depositors but it could very easily become a tide and fell the society just as happened with the Northern Rock.

And yet, we also get rumours in the other direction. Thus the markets don’t seem in such dire straits lately as they were not so long ago. The flow of companies announcing bankruptcies seems to be slowing (no substantial companies for a while now) and even the housing market may be in the first stages of an upturn.

The problem isn’t the rumours as such but rather that in dire economic times the effect of such rumours tends to be much more extreme than would normally be the case. That’s, of course, why the government tend to be somewhat more reluctant to say anything as it’s extremely easy for an off the cuff comment to be perceived as negative these days. Still, we’re sure to have a new government soon, aren’t we? Or is that just a rumour too?

With the world economy falling apart around us this is one of those times where many people wish that they had invested in gold as, of course, with everything else falling gold is doing quite nicely as usual.

The key thing is to keep your savings and investments diversified and moreover to keep to a regular savings and investment programme. If you’re doing that, it shouldn’t really matter whether the price of gold is sitting around the $200 mark or if it’s sitting at the $900 mark since, as with all investments, it’s pretty much impossible to hit the bottom of the market when you’re buying and it’s equally difficult to hit the top when you’re selling. That said, the gold price is currently off the top achieved in May.

But if you’ve decided to buy some gold bullion for a rainy day, how do you go about it? In principle there are all kinds of investment schemes around these days which let you buy a share in a pile of gold and that’s a sensible way to go about it in that the costs are lower than they are if you some gold bars. However, that lower cost comes at a price, namely that you’re trusting that some intermediary actually has that piece of gold for you and that, should they go bankrupt, that you’ll be able to get your little piece of gold. Certainly these firms have all kinds of reassuring things to say about that but at the end of the day, to my mind, there’s nothing to beat having a lump of gold in your hand.

If you’re aiming at looking after the gold yourself it’s relatively easy to buy it these days by way of Bullion by Post who offer the usual range of investment sizes of gold bars. In terms of bars, the smallest that you can get is the one ounce bar which weighs in at around £600 these days (the price varies throughout the day) or you can get the one kilo bars that you see in photos of Fort Knox and the like for around £19000. The larger bars carry less of a premium over the spot price for gold (ie they are cheaper per ounce of gold) but unless your portfolio is really large the larger bars aren’t going to be terribly practical purchases for you.

One thing to bear in mind if you’re collecting these things in your house is the security and insurance aspect. Clearly if you are stockpiling gold in your house you’re building up a major asset and your insurance company would want to see it adequately protected. It’s possible to avoid this hassle by using a safety deposit box in your bank which will save on the insurance and you may be able to get it free too depending on your bank.

We’ve lived for decades, centuries even, in an era when prices are, on the whole, expected to increase year after year for the vast majority of goods.

The only category of goods where we are familiar with the effects of deflation are electronic goods and in particular computers so it’s helpful to examine how we treat those. For these there is the expectation that each year will see computers that are a little bit better than their predecessors and additionally they’ll be cheaper. What happens therefore in our buying decision is that we wait until we actually need a new computer before buying one. Now in respect of computers “need to buy” is slightly different from normal products in that there is innovation in the software too which forces us into purchases that would otherwise be un-necessary: that would be unlikely to happen with a normal product.

On the other hand, in an inflationary environment we buy a car now rather than next year because we can be confident that the car will be more expensive and so it is with pretty much everything.

You can even see the effect yourself by considering petrol prices. Until a month or two back I filled the car as often as possible on the basis that the price was rising quite sharply and could be expected to continue doing so. Then things changed as prices started going down very sharply indeed. The approach then was to fill the car only when absolutely necessary as that would be likely to get me the lowest price overall.

In fact, deflation might be a good thing to have but the snag is the period of adjustment that would be required would be extremely painful for everyone. The change from a “buy it now” attitude that’s relevant in an inflationary environment to a “buy it later” attitude appropriate for deflationary times means that factories build up stockpiles and therefore need to cut back on production and the jobs associated with it ie unemployment jumps. At a more personal level, house prices drop dramatically both because of the increased unemployment and because people are moving to a “buy it later” mindset.

One side-effect is that innovation is forced upon many industries which is usually a good thing to happen. However, it’s not an option for a considerable number of products: when was the last time that there was a really innovative potato?

On the whole, it probably is a good thing, it’s just that the transition period would probably be far too painful for governments in general to accept that.