So where on earth do you invest now?

So where does the cautious investor who would like to make an above bank deposit rate return on their cash place their money today?

The friend mentioned in the first paragraph had dabbled a little in the gold bullion market and sold before the correction in January, and was now invested in silver which he saw as relatively undervalued.

Indeed, gold and silver are undervalued historically in relation to both the S&P 500 and commodities such as oil. On the principle of every dog having its day, gold and silver ought to be due for a bull run.

Add the rather better argument that financial markets look in a precarious state and that gold is a safe haven in a financial storm, and there is the beginning of a sound investment case.

If you are looking for commodities that have missed the recent rally then grains - currently at a 20-year low - look a good buy, particular in view of the erratic climate we are enjoying these days.

My smart money friend was also investing in Thai real estate and taking a small position in the Thai stock market. That is pretty clever as Asian stock market valuations are lower than in the West, and the currency is also undervalued and likely to improve in value in the medium term.

Neither of us could get up much enthusiasm about bonds. There is a good argument that if the US financial markets take a plunge then the Fed will have to maintain ultra-low interest rates for a long time, and this would be good for bonds.

But with oil prices likely to spur consumer price inflation this looks a questionable scenario. Moreover, 10-year bond yields are already so low; you have to ask just how much lower could they go?

However, one thing a cautious investor almost certainly should not do is to leave his cash in a US dollar account. The downward pressure on the greenback is so heavy that what looks like a risk-free option could be a sure-fire way to loose this year.

Diversification of currency holdings is a good idea, and the Swiss franc and Singapore dollar are top favorites among savvy investors. Try a currency passport account for size in 2005.

The whole trick is to have cash available when the overvalued major financial and housing markets tank. Note that the word is not 'if' but 'when'. The smart money is moving out of those markets.