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[ INFLATION / DEFLATION ]
rock-bottom interest rates as there
is currently little opportunity cost in
owning zero-yielding bullion.
One option for anyone bothered
by the unproductive nature of the
precious metal is gold mining stocks.
Jourdan says that while this is riskier
than just buying the commodity itself,
it is a more productive use of money,
as it is possible to make good returns
even if the gold price doesn’t rise.
“The key is to invest in well
financed, high quality and well-run
mines with world-class deposits,
stable jurisdictions and a lowestquartile
cost of production,” he adds.
Reverse ferret
Unfortunately, it is not just a case
of piling into inflation-proof assets
and adopting the brace position.
David Coombs, head of multi-asset
investments at Rathbones, believes
deflation may be more of a problem,
especially in the short term.
“The amount of fiscal and monetary
stimulus is off the scale,” he says.
“There is no parallel through which
to measure this and we have no
idea whether it will succeed, nor do
we know where it ends or what the
impact will be. If you’ve got central
banks issuing debt and then buying it
back and writing it off, that is putting
a lot more money into the economy.
“But if we didn’t have this stimulus,
we would have five to 10 years of
deflationary forces affecting the global
economy and those haven’t gone
away. If anything, they have been
accelerated. So you’re going to have
the structural forces of deflation versus
the tactical impact of stimulus, which
should be inflationary, with the two
meeting in the middle.”
But which of these forces is he
backing to come out on top?
“The first thing to say is, I don’t know
– anyone who says they do is being
disingenuous,” he continues.
“It almost doesn’t matter – what
matters is what people think will
happen because that’s what will drive
the market in the short term.”
With so many structural shifts going
on, Coombs wants to hedge his bets
either way. However, if he were forced
to bet, he would put his money on the
bond market being right.
“At the moment the bond market isn’t
worried, it is telling you this recession
is just adding to the deflationary force,”
the manager says. “But I think in the
short term, inflation expectations
could rise even if inflation doesn’t, and
“The amount of fiscal
and monetary stimulus is
off the scale. There is no
parallel through which to
measure this and we have
no idea whether it will
succeed, nor do we know
where it ends”
I want to hedge that out as well.”
Cash and high-quality bonds do well
during times of deflation, but Coombs
says there are a couple of equities that
should be OK as well.
“You want to own Amazon whether
it is inflationary or deflationary,
actually,” he adds.
While it is possible to protect against
inflation and deflation if you make
the right call, Smeaton worries about
whether the wider industry is prepared
for a switch to either outcome. He
believes there is a problem specific to
this moment, of which he may be a
symptom.
“I started investing professionally in
2007,” he explains. “Most people in the
market, myself included, have never
really seen an inflationary period and
we don’t have the institutional memory
to cope well with it either. It could
become a tricky environment – but also
a learning opportunity for everyone.”
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