Complex Made Simple

Precious metals and Asian currencies top tips for 2008

For 2007 this column tipped precious metals as the top buy for annual gain, with the purchase of silver in late summer as a good trading position to adopt. This proved accurate: silver is up 17 per cent since the summer. But good old gold once again outperformed over the past 12 months, up 23 per cent to silver's no change.

Our predictions of a ‘stormy year in financial markets’ in 2007 were more than realised with the banking crisis that started this summer, although an expected sell-off in global stock markets along with oil and other commodities did not materialise.

However, this is probably the next stage in the unfolding global crisis in capital markets with stocks looking considerably overvalued in view of the ongoing banking and housing crises in the US.

How is it that UK and US equities are trading at pre-crisis levels? The slowdown in credit alone in 2008 is going to impact on corporate profits across the board.

Markets will surely soon wake up to this obvious reality and mark stock prices sharply lower; and emerging markets will fall further as they are now ridiculously overvalued, above the level of industrialised markets.

Bearish on equities

So you will not want to have your money in equities in 2008. Hopefully you have also taken this column’s advice to sell real estate in most developed markets – the outlook for 2008 is truly awful as the ongoing decline plays out to its logical conclusion.

In the UAE real estate is perhaps more insulated than anywhere else in the world and will be supported and possibly strengthened by lower mortgage rates courtesy of the US dollar peg. But do not expect the bumper price rises of recent years as supply increases and some foreign buyers disappear.

Oil prices will fall in 2008 as the consumer economies deteriorate and speculators could well back out of the oil market causing a spectacular price fall, unless some geopolitical emergency strikes.

Indeed, weaker industrial commodity prices across the board are most likely, with only poor harvests keeping agricultural products expensive. And it is hard to imagine GCC equity markets performing well if oil prices decline sharply.

Golden opportunity

In a big sell-off of equities and a slump in industrialised commodities it is likely that speculative positions in precious metals will also be sold down, hitting prices.

This column sees this as the best buying opportunity in 2008, which will otherwise be a very disappointing year for investors. Even those betting against the US dollar might find themselves on the losing end of an unexpected rally to a safe haven in a sell-off.

Buying silver on weakness in late summer worked as an investment ploy in the difficult markets of 2007, and is likely a good strategy for 2008. But gold would have actually been a better buy than silver in the summer of 2007 and it might be wise to learn from this error of judgement and stick to the yellow metal.

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