September 11 changed the way investors look at risk in building capital or preserving wealth. They are confused and fearful. Many do not know what to do. One answer may be, do nothing.
Jack Bogle, 72-year-old founder of the US Vanguard mutual fund group counselled recently: "If you are worried about the coming bear market, excited about the coming bull market, fearful about the prospect of war, concerned about the economy, or indeed about the state of mankind, then in all probability your opinions are already reflected in the market." In other words, it may be too late to sell, and too early to buy.
Asian stock markets were in abject decline long before the attacks on Manhattan. There were clear signals that the business climate was soon going to be hit by severe squalls blowing in from America. Nobody anticipated the chilling terrorist and military dimension.
For anyone under the age of 45 who is saving for retirement through a managed plan, tumbling share prices are good news. Their pension funds and unit trusts will be buying stocks cheaper, and they have decades of investing ahead of them. The advice from Bogle to "stay the course" is sound.
However, many of us need to figure out whether our investments are well enough diversified across a range of asset classes. Broadly these are cash, bonds, equities, property and, what would you know? Gold.
The big decision is whether you primarily want a good stable income stream or capital gains. Sorry, you cannot have both. Not easily anyway.
The reigning king is cash in the bank. Even that is a problem. You need to be in the right currency. For the past six years it has seldom been wrong to be in US dollars, or anything that looks like them.
Despite the slowing economy, foreign investors bought a net US$299 billion of US assets in the first half of this year. Much of that money flowed into government bonds. Professionals often use the interest rate paid on US 30-year Treasuries, currently 5.4%, to define a risk-free annual return. Go for something considerably higher than that, and you are in the high-risk category. Settle for a yearly return of significantly less, and you will never get rich.
The recent stampede to safety has seen the yield on two-year US bonds fall to a miserly 2% - the lowest since the first man walked on the moon. Parking cash in that space was still fine, while the greenback ruled supreme, but it has begun to wilt as the economic slump skids into recession.
JP Morgan Chase analysts forecast the dollar will fall to parity against the euro by the end of the year - just in time for the common currency to begin rustling through billfolds and shop tills. Not all investment banks are as bearish as that, but the consensus is for further weakening of the dollar against the euro and the yen.
As for the stock markets, those players who took their chips off the table before the lights went out, or were not even in the game, are in great shape. Share prices, especially in Europe, have been dramatically oversold, and there are bargains on the Asian bourses. Established companies with strong cash flows and a long record of dividend payments should be the picks. But there is no hurry. We may see a few false dawns.
Bricks and mortar might do well, with the cost of borrowing at 40-year lows in many countries. But property is notoriously illiquid when confidence is shaken. Buying your own home, and accelerating repayments on your mortgage if you have one, is an attractive strategy.
And what of gold, the orphan Annie of the investment world? It is symbolic that 12 tonnes of the yellow metal is believed to be in Scotia Mocatta's underground depositary deep below the rubble of the World Trade Centre. It is expected to be recovered intact. The virtual indestructibility of gold, its anonymity, and the fact that it knows no borders, has seen it sought after in times of danger. Historically, it has been regarded as a storehouse of value and an alternative to vulnerable paper money. South African, Indonesian, Thai and Australian holders of gold are in fat city as their currencies crumple.
The gold price hit its all-time high of US$850 an ounce in January 1980, ironically just after the Russians invaded Afghanistan. Since then, it has been on an almost uninterrupted death march. It has been weighed down by an absence of inflation, the popularity of stocks, general political stability, the strong US dollar and relentless selling by central banks that still hold 30,000 tonnes in their vaults.
It took an unprecedented outbreak of terrorism and a global market collapse to push the price up just US$20 to a recent peak of US$293, and it is struggling to hold that level. So why buy now? Well some people have been. The World Gold Council reports that Middle East gold demand rose 6% to a record 282 tonnes in the first half of 2001. Oil-rich states like Saudi Arabia led the way. About 80% of the gold purchased each year goes into jewellery, with the rest split between industrial uses and the gleaming smiles of folk with gold fillings. US investors have been rushing to buy gold coins for the first time since the uncertainty created ahead of that great Y2K millennium bug hoax.
Hedge funds that made huge profits out of borrowing gold from banks, selling it forward on the bullion markets, and popping the proceeds into US Treasuries, are finding that is no longer a one-way bet. Central banks have been lying very low in the gold market. The last auction of 20 tonnes by the Bank of England in September may be the ultimate contra-indicator.
A few hard-headed professional investors believe the 20-year bear market in the metal has been halted. Kerr Neilson, chief of global strategy at Sydney-based Platinum Capital, says "treating gold principally as a commodity, we observe that demand is about 1,000 tonnes greater than new supply, which is running at about 2,600 tonnes a year. Combine this with unsettled currencies and turbulent markets and we can readily see the price spike by 10% or 20%". Deutsche Bank recently headed a note to clients: "In gold we trust."
One of the most renowned gold experts in the world, Andy Smith of Mitsui Precious Metals in London, expects gold to reach US$340 by the end of the year following the decline of the "dream machine, which brought us low inflation, well-behaved economic cycles and unprecedented personal freedoms".
Low interest rates are bullish for gold because they reduce the opportunity costs of holding the assets. Only a few months ago deflation was the major risk for much of the world. Cutting interest rates now, against the backdrop of an international crisis with the dollar on the ropes, could prove super bullish, by ushering in inflation.
Asians have traditionally revered gold, but a whole generation has grown up believing bullion was for the birds. There are a myriad of ways of buying gold in Asian cities from tael bars or Krugerrands and American Eagle coins, to paper gold certificates issued by banks. Gold jewellery is great to wear, but trickier as an investment, with retail mark-ups and fabrication costs chewing up 20% of the costs.
Less direct avenues include buying units in gold funds, which began to perk up early this year for the first time in five years. Then there are shares in gold companies. Australian gold miners should be the best of the bunch. The moth-eaten Australian dollar means that producers are getting the equivalent of A$600 an ounce for gold, which cost them half of that to dig up. Unfortunately, most gold miners did not believe their own story, and have been heavily selling on the forward markets. The industry has hedged 1,125 tonnes of gold, or four years production. If the price goes much higher, some will actually start losing money by being forced to buy back hedges. Shares to consider might be those of Lihir Gold, which has most of its production in Papua New Guinea, and the lightly hedged Delta and St Barbara mines. In North America, Placer Dome and Barrick Gold are among the favourites.
A note of caution: Gold has flattered many times only to slink away again. On this occasion, the disappearance of the peace dividend and the slumping dollar gives the old deceiver its best chance in years. Still, 5% or so of your net worth in gold would probably be more than enough.