Weathering the Storm

Recently, I was asked by a client where he should place £700K, which he has in a bank, earning a rate of 3.9%.

What may seem as a return given by the bank may not be so in real terms.  If inflation is running higher than the interest rate being paid your money is actually being eroded.  You will notice when you try to spend the funds and everything has gone up.  Money has no intrinsic value; it is a medium of exchange.  Therefore, if you can exchange less with it than before, its actual value has decreased.  This is the consequence of having a fiat currency; it’s actually just an elaborate Ponzi scheme.

So, where should the money be invested?

In August 2021, a company purchased $50 million of real gold, and then paid for the storage of it.  Note, this was not a position on gold, but the real stuff.  This company is not a gold trading company, therefore, this action raised a lot of eyebrows in the market.  The company is called Palantir and it specializes in data-gathering and analysis, most of which it does for government agencies.

This seems to be a wise move as the prices have risen about 25% from the time of purchase.  But I suspect this company, because of the niche sector it’s in, knew more than the masses; and therefore, is preparing for the coming times.

Gold is a hedge against inflation, the other is property.

One observation is gold doesn’t produce an income, you need to sell it in order to derive its value and spend, property on the other hand does.

In my opinion, in this scenario, the type of property one should purchase is one which will be attractive to the average person, so about the £300K mark, with about 50% gearing.  The interesting point regarding debt in this high inflationary environment is that in the same way money shrinks, so will the size of the debt – in real terms.  So even if you’re paying say 4.5%, if the rate of inflation is running at 10% your debt is shrinking in actual terms by approx. 5%.  A very interesting and counterintuitive phenomenon.  Therefore, assuming you invest wisely, not only will you make money on the rental income flow, and the capital growth, you will make money on the debt.

When you’re anticipating on making money on three fronts, it doesn’t become a big issue if one of them doesn’t quite work out.  Though there is no reason why this should occur; with careful planning all three can be achieved.

The growth of the property will be driven by location, the rental will flow from this.  The rental can be insured, so if the tenant stops paying the insurance company will take over.  This is not something one gets with commercial property.  The mortgage product should be done on a 5 year fixed rate basis.  There are products on the market which have a fixed rate but at the same time have no ERCs attached to them, so you get best of both worlds.

This is what we will be putting in place for our client.

Suresh Vagjiani

Suresh Vagjiani
Suresh Vagjiani
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