Which asset class next for Gulf investors?

It has to be said that the outlook for the GCC stock markets is not a particularly bright, although the probability of a 'dead cat bounce' or retrenchment rally is good.

However, in a falling market buying on the dips is a classic formula to get totally wiped out if the market turns down again. Trying to catch a falling knife is another way to look at it.

Commonsense surely suggests that when a lot of investors have just lost a lot of money they will be ruled by fear and not greed, and so a very large rally in Gulf stocks should not be expected.

US dollar risk

On the other hand, oil revenues have left the Gulf region awash with cash trying to find a home, and the returns on deposit accounts and US bonds are not brilliant, especially as the US dollar seems to be falling in value quite strongly, with the chances of a big devaluation this year also strong.

As forex experts are happy to point out, even holding cash is an investment of sorts, as the value of the money itself can fall relative to other currencies and assets. Perhaps then Gulf investors should be less ambitious than in the recent past, and start to look at how to protect the value of their wealth rather than achieve exponential growth.

Playing foreign currency markets is one way of achieving this, and can be as modest as depositing money in another currency and forgeting about it. Or the more sophisticated investor might choose to take up one of the many online forex brokerage accounts and take a more active trading position.

Gold as a hedge

Online forex accounts also often offer gold and silver as quasi-currencies, and it is perhaps to precious metals that Gulf investors should turn their attention next. Gold and silver are a useful hedge against US dollar weakness, and this asset class could itself enjoy substantial growth over the next couple of years.

For in the commodity price inflation cycle, precious metals are laggards and have yet to repeat even nominal prices reached 25 years ago. This market is also a limited one, so a relatively small increase in demand can translate into substantial price movements; and indeed gold is up by more than 30% over the past year.

In the late 1970s, the last great oil boom in the Middle East, gold prices benefited enormously from the flow of funds from the region. As so often it may be that history repeats itself, especially as gold remains cheap in real terms while US equities are at a five-year high - usually a danger signal - and global real estate looks absurdly overvalued.