Our content this month are as follows:-

• All that glitters...
• In the News
• Books we have read
• Quotes of the month

Imagine, if you will, a market where prices peaked 30 years ago and are currently at 50% of that peak. How long might it be before prices recover (in real terms) to their previous high - another 30 years, 40 years? Would you be a buyer in this market? Might you, like most, have abandoned it many years ago and never thought about it again?

You have undoubtedly guessed from our headline that we are talking about gold, that most seductive of precious metals. The price of gold has in recent years risen from around $275 an ounce (when Gordon Brown sold Britain's reserves) to the current price of over $1000 an ounce. It attracts constant comment in newspapers and magazines where it is often recommended as a hedge against inflation or some sort of financial meltdown. The recent increase in price is attributed to the expectation that inflation will rise, following a huge injection of money into the world economy by its central bankers.

It is important to remember that gold is not an investment; it is often promoted as a "store of value", but you may have a different opinion if you were a buyer 30 years ago. Gold is a commodity which, self-evidently, is extremely difficult to value; it lends itself to speculation and buyers buy in the expectation that the price will go up and sellers sell in the expectation that it will go down. There is no dividend stream, nor interest to compensate you for holding gold, rather than shares or bonds.

Consequently, it is easy to exclude from portfolios and easy to ignore the gurus who urge its purchase.

(We know we cater to a sophisticated market and acknowledge that the quotation from Shakespeare's Merchant of Venice is, "All that glisters is not gold." We have simply used the more modern version.)

Economic conditions and markets

An interesting article from Anthony Bolton in the Financial Times this month. Towards the end of 2008 and in early 2009 Mr Bolton was predicting an upsurge in markets; on this occasion his luck was in and markets have of course risen. What was really interesting is a comment he makes in the article as follows:

"When I became optimistic about markets in the last quarter of 2008 and the first quarter of 2009, I received a huge amount of push-back from the audiences that I spoke to. Didn’t I understand that the economic outlook was dire and possibly the worst for a generation, they asked me? The biggest problem they had was that I couldn’t give them persuasive economic reasons to explain why I saw a more rosy future than the negative consensus would have them believe to be true.”

Many journalists and gurus believe there has to be a clear connection between economic conditions and the state of stock markets; this is not the case currently and has rarely been the case in the past. Most of our readers will remember the brutal economic recession of the early 80’s in the UK, when Britain's manufacturing base was rapidly eroded, house prices dropped and kept dropping, jobs were lost in their thousands on what seemed like a weekly basis and inflation was rampant. These were the conditions from around 1978 up until around 1984/85. Before, during and after that period the UK stock market had only positive years, at a minimum of around 8% growth up to a maximum of around 32%. You would be hard pushed to find economic reasons and logic for the markets performance, but perform it did, at an annualised rate of 22% per annum compound (FTSE All Share, January 1978 to December 1986).

So when experts and commentators tell us that we are in for more economic bad news they may well be right but it will not necessarily affect stock markets in the same way as it does the economy generally.

This month we are recommending "When The Lights Went Out" by Andy Beckett.

The subtitle of this book is "Britain in the Seventies". If you lived through them and remember them then much of this book will contain familiar scenes. Wilson and Heath, power cuts, miners strikes, militant unions, Grunwick, Saltley, Denis Healey and a loan from the IMF, the rise of Margaret Thatcher and, of course, the Winter of discontent.

Some things may surprise you however, working days lost through strikes were significantly down in the late 70’s compared with the early 70’s. By the time the IMF loan was made Britain did not really need it and repaid it in half the specified time. Labour increased their vote in the 1979 General Election, Denis Healey embraced monetarism long before Margaret Thatcher, and Mrs Thatcher’s very tenuous hold on power in the very difficult early 80’s. Well worth reading to compare your memories of the decade with what really happened and if you were not there a very interesting account of a tumultuous period.

It is available from good bookstores and Amazon, but if you have any difficulty finding it please contact vickie@indexwm.co.uk.

"No matter. Try again. Fail again. Fail better."
Samuel Beckett

“Idealism increases in direct proportion to one’s distance from the problem.”
John Galsworthy