Complex Made Simple

Protecting your assets when recession hits

With the Government of Singapore Investment Corporation, a $100bn sovereign wealth fund, warning that the world economy may be headed for its worst recession in 30 years, investors should be on red alert. It is not too late to take a number of basic steps to protect your wealth as this storm erupts, and sell out of losing positions.

‘We could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years,’ Singapore Investment Corporation deputy chairman Tony Tan told staff this week.

For individual investors, the challenge is equally huge but unavoidable.

One approach is to look back at 1978 or thereabouts and ask what would have worked best for investors then.

It is at least a more sensible approach than looking wistfully back at the past few years and hoping the boom might return.

Well, what happened after 1978? We had a second oil shock with the Iranian revolution and US hostage crisis and the Russian invasion of Afghanistan.

Then Ronald Reagan took over from Jimmy Carter as US president in 1980 and tackled inflation, but the global economy remained in very poor shape for a couple of years.

Gold boom

Could you have made money during that period? It was not easy. Gold prices soared from 1978 to 1980 and then slumped. Real estate and stocks recovered from the 1974 debacle but did not perform well. Over the whole of the 1970s, cash was the best performing asset class.

It could be that the next couple of years are a re-run of the late 1970s for gold investors. Legendary trader Jim Sinclair is offering a $1m wager that gold will top $1,650 by early 2011, and reckons gold stock prices will perform better than bullion in that period, and the junior explorers best of the lot.

Yet as in the late 1970s it could be a pretty narrow window of opportunity, with precious metals one of the few asset classes to deliver stellar returns, although high energy prices would be the second most obvious choice, with clear implications for continued strong asset prices in the Gulf States.

Trends end

You might want to remember, however, that all up trends come to an end. This correspondent still has the stamp collection he bought as a hedge against inflation with pocket money in the 1970s. It remains worth less than it cost at the time!

There simply are periods when you can loose money by investing and would do better staying in cash, and this might well be one of them, particularly if you are bright enough to later switch your cash into hard assets at the right time, and buy low.

But thinking back again to 1978, the parallel with today is not entirely justified, as real estate prices were then rebounding from the mid-70s crash and not on a falling trend. Inflation was higher, or at least officially recorded inflation was higher.

The capitalist world was also a smaller place with far fewer nations and a greater reliance on the US economy. But the past is still a better guide for investors than the recent boom.

See also:
How to ride the gold and silver bull market: Part 1
UAE banks skirting global financial crisis