x Abu Dhabi, UAEMonday 22 January 2018

When dishwasher breaks down, invest in commodities

The demise of a household appliance signals that it is time to fight inflation by investing in commodities.

The first sign of trouble was a nasty smell of burning plastic from the kitchen. It wasn't my night to cook, so I knew I couldn't be blamed for the odour. I peered cautiously around the door. The culprit was the dishwasher, which was spewing out an alarming cloud of smoke.

There are few things more distressing than watching the demise of a household appliance. It means having repairmen around, who shake their heads and mutter about the perils of not buying German. And a trip to the store to try to make sense of dozens of brands, all of which seem to have been assembled in the same village in South Korea.

The only consolation from this unhappy event was that it allowed me to execute "Rule One" of beating inflation: invest in commodities and durable goods. Because it's pretty obvious now that the inflation cycle, and interest rates, are about to change.

Inflation has the effect of costing you money without even having to reach into your wallet. Like your children, inflation will insidiously drain your cash and, at the end of the day, you'd be darned if you can tell where it went.

It's based on the Dick Whittington principle: if the mythical city where streets are paved with gold were to exist, gold would be worth dirt. This is exactly what is happening now. Governments have been pumping cash into their economies over the past couple of years as they try to reverse the effects of the global credit freeze.

Eventually, all this money builds up (although not in my pocket, alas) to the extent that it begins to lose its value.

The US Federal Reserve bought more than US$1 trillion (Dh3.67tn) of mortgage-backed securities and $300 billion of long-term government bonds over the past couple of years. And still it wants to buy a further $600bn of long-term government bonds this year, according to The New York Times.

With all this dosh being churned out, even the most optimistic economist will tell you that inflation is inevitable. Which means that if you placed a Dh100 note in your pocket today and fished it out a year from now and dusted off the lint, it would be worth Dh90 at most.

Already, the UK's Retail Prices Index (RPI) inflation - which includes mortgage interest payments - rose above 5 per cent for January, putting the Bank of England under pressure to raise interest rates.

The first rule, therefore, of surviving inflation is to put money into tangible assets: commodities and durable goods. Most fund managers are now recommending gold, silver, platinum and oil through an exchange-traded fund or mutual fund. Experts variously say that between 5 per cent and 30 per cent of a portfolio should be in the yellow metal. Last year alone, gold rose almost 30 per cent, driven largely by inflation worries.

For those of us who can't afford gold or durable goods - those things economists and Martha Stewart say we need for day-to-day ease of living - are in the same category. Anything that you will use regularly, but is likely to go up in price along with inflation, is a reasonable trade for your cash.

"Rule Two" of surviving inflation is to reduce debt. That goes without saying. The less you owe, the less interest you pay.

And "Rule Three": fix your mortgage, if possible. I know many commentators like to debate the premium you pay for a fixed-rate home loan and whether the risk that it falls below your rate makes it a worthwhile step. But interest rates are now at historic lows and this cannot go on.

The US prime rate (to which the UAE's is pegged) is now at 3.25 per cent, a level last seen in 1958. It's easy to forget, though, that in 1980 it touched an all-time high of 21.5 per cent. This was at the eye of the Iranian revolution and the resultant shock in oil prices that created a deluge of inflationary pressure.

As long as Ben Bernanke is running things at the US Federal Reserve, it's unlikely we will see a return to those levels again, no matter what happens to the oil price. He believes that more money, not less, is needed to keep the world's economies turning.

But it's clear that there is a lot of room for rates to go up. So financial planning from here on out should be with inflation in mind.

And, when it comes to appliances, always buy German.

Gavin du Venage is a business writer and entrepreneur based in South Africa.