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Portfolio for the paranoid

30 December 2011 By Wayne Arnold

Hard times bolster the case for hard assets. Printing money to generate growth provides a tempting way out. But that undermines the value of financial assets, and civilisations that depend on workable means of monetary exchange. Servicing sky-high national borrowing without raising taxes, cutting benefits or deepening unemployment is a political nightmare. And while social pressure could undermine financial systems, seized-up finance could send societies into a new dark age. Gold, canned food and shotgun shells may be the safest bets in 2012.

Scared investors may be tempted to buy bonds from governments likely to withstand the worst, like Canada, Sweden or Norway. But if the global financial system breaks, who is to know if the assets are retrievable? Capital controls and other nationalist regulation might keep savings locked inside foreign countries.

The same, at least in part, goes for equities. They are paper securities. But shareholders have ownership rights that are comfortingly real – if corporate cashflows survive the meltdown. Utilities like Germany’s E.ON and personal care companies like Procter & Gamble outperformed in the early months of the global crisis. Their attractions may well endure.

Cigarettes and hard liquor, as well as being in dark-age demand, might quickly become new currencies. Investors worried about recession and currency debasement tend to stick with hard commodities whose price doesn’t depend on consumption. Precious metals such as gold tend to rise with inflation whether it’s being driven by booms or busts. Gold rose 20 percent in the year after Lehman’s failure and, as dangers grew in 2011, rose again. Year-end falls give gold some allure of value: but investors who buy gold-related futures or exchange-traded funds might find themselves on a hiding to nothing. In an extreme crisis, when payment systems fail, such paper-electronic securities could prove worthless.

The concrete nature of built property, though not portable, would prove valuable. In a new dark age, agricultural land will be the thing to have. Diamonds are easier to carry – ounce for ounce, uncut stones are worth roughly ten times gold. If it came to that, though, can openers could prove still more prized. You might have to forage for yourself, too. So don’t go short of shotgun shells.

Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual ’Predictions Book’, produced in print and electronic form early in the New Year.


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