Golden opportunity to make the most of eventual upturn

Just before the general election last year, I argued that what we were experiencing in financial markets was fundamentally unlike anything we had seen before.

In short, I said that this time it was different. Predictably, this view sparked a backlash because apparently things would soon enough revert to the norm.

Given that I was writing two years ago about interest rates remaining static for a number of years, which flew in the face of the consensus, I can at least claim to be excluded from the herd.

I might add that I am also something of a gold bug, which again marks me out from the majority.

I think that being contrarian is a great quality, but unfortunately too many people lay claim to this stance who in reality are simply dogmatic. It is too commonly used as a defence against prevailing sentiment. You need look no further than the result of the last Scottish election to understand this.

We live in a world of constant change and sometimes we need to accept the fact that our traditional views can become misplaced. Many government policies and actions are influenced by economic models based on what occurred in the previous decades. Since 1980, interest rates have generally fallen while debt burdens have risen.

Gordon Brown, right, based his entire economic policy on consumption-fed debt, which basically worked on the belief that as long as people felt secure increasing their borrowing, they would also continue spending. Underpinning this was the fact that property prices continued to rise, so debt was being offset.

Jump forward to now, and it is clear that most people are actively paying down debt, which means, of course, that they are spending less. As a result, any thinking or decision-making based on the historic pattern is dangerously irrelevant.

Relating this change to investment markets, it might be argued that anyone telling you that shares in certain companies are worth buying because they are “cheap on a historical basis” is missing the point.

It might just be that we need to damp down our assessment of real value prior to purchasing. Always remember that the most commonly used valuation of a share price is based on future earnings, and when such earnings fail to materialise, the price is only likely to go one way.

Additionally, we keep being told that there is currently a stock market sale taking place. This may be true, but the sale will be continuing over the coming months and possibly years, and there might also be further reductions on offer soon.

So it might not be a bad idea to hold back prior to purchasing on more than a selective basis. The real danger lies in being too bullish, and perhaps forgetting that things are usually cheap for a reason.

Don’t get me wrong, I also believe that from all the current problems besetting our economy, the eurozone countries and the United States will emerge as the investment opportunity of a lifetime. It is just that it is impossible to accurately predict when such a time will be – but come it will. Patience will be rewarded.

For now, I urge those who have not yet done so to seek some exposure to gold within their portfolios. It is still massively under-owned, and should the authorities decide to turn on the printing presses once more in a further attempt to stimulate markets, it could soar from current levels.

Even if we see a fall in the short term, I firmly believe that in the coming years you will be very glad that you went for gold. Now that is a contrarian view.

lKen Taylor is director of Mackenzie Taylor Wealth Management. www.mtwm.co.uk