Foresighted not short-sighted

9th March 2022

The current rise in the consumer price inflation is at 5.5%.  This is very high.  The bank base rate is currently 0.5% raised recently from its all-time low of 0.25%.  Petrol prices have increased from £1.23 per litre to currently £1.55 (at the time of writing); and expected to rise to even £1.75; whilst your money in the bank is earning only 0.8%.  In comparison the fuel rate has increased by 26% and is likely to increase by 42%.

Does this mean you’re better off taking your money out of the bank, filling up as many Jerry Cans as you can with fuel and keeping them in your back garden?

This is the stark reality of when inflation starts to erode your savings.  At some point one would expect bank rates to rise, otherwise people would do just that.  OK, well perhaps not exactly, but there would be a move out of banks and into real goods.

In short, if one does nothing and stands still, the money in the bank is likely to erode in value.  Purchasing a real asset will serve to mitigate the effect of future inflation and perhaps even allow people to thrive from it.

An interesting point of note is a company called Palantir recently purchased $50 Million of 100 ounce gold bars, and had them stored in a facility.  Note this is not simply taking a speculative position in gold; this is the actual physical bars which would have a high cost associated with storage.  Yet this is exactly what this company did.  It is not a gold trading company.  This is highly unusual for a company not associated with gold trading to make a move such as this.

The insight of why can be perhaps gleaned from its name.  The company’s name is derived from The Lord of the Rings, where the magical palantíri were “seeing-stones,” described as indestructible balls of crystal used for communication and to see events in other parts of the world.

Clearly it has seen something which is due to happen which the masses have not.

This rise in rates too will trickle down into mortgage rates, especially the fixed ones, if there is an expectation of future rate rises.

Currently the mortgage rates for BTL investments are still historically very low, there are products on the market for 1.44% fixed for 5 years on a BTL basis, and ten year fixed rates at 2.45%.

There are still places in London where the yield will be in the region of 4-5%, meaning even if you borrowed the whole amount the investment would give you a positive monthly cash flow; all the while hopefully the underlying asset will be increasing in value as well.

Unfortunately, inflation is not the only concern; more sinisterly death rates have taken a sharp increase.  Aegon life assurance company have recently reported a hike of over 358%.  This too will trickle down to the life assurance premiums.

Suresh Vagjiani

Suresh Vagjiani
Suresh Vagjiani
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