Member Article

Preserving wealth against inflation

Richard Clark and Simon Patterson are private bankers at Barclays Wealth and Investment Management. Here they look at preservation of wealth against inflation.

Gold, house prices and quantitative easing are the topics we get asked about most often. They are of course linked by a common theme – how best to preserve wealth at a time when central banks seem to be taking risks with inflation. Gold and property are two real assets that might be thought to offer some protection against inflation, while the large-scale buying of bonds by the Federal Reserve (Fed), the Bank of England and the Bank of Japan has contributed to those perceived risks.

So when the Fed decided in September not to start tapering its bond purchases, but to continue buying at an unaltered pace into the autumn, it was no surprise to see gold prices jumping more than most asset prices. If there were real-time indices for prime real estate they might have leapt too.

Central bankers’ monetary promiscuity may not do much damage, however. Their purchase of bonds is not a literal printing of paper money: in contrast to the Weimar Republic, the money created now is mostly sitting latent in the banking system, not showering confetti-like onto the high street. This is why, in the jargon, monetary velocity has unsurprisingly fallen: the new money is not being used for transactions.

For it to become more directly active, in the “too-much-money-chasing-too-few-goods” sense, it needs to circulate more widely. This, in turn, requires greater demand for (and supply of) bank credit. In the meantime, the economic impact of quantitative easing (QE) has been largely limited to its indirect effect in helping keep bond yields – and mortgage rates – low.

Even if the liquidity created were to leak into the wider economy, there may be enough spare capacity – particularly in the US, UK and most eurozone labour markets – for it to be absorbed without pulling prices higher. Output and jobs can take up the slack first.

Should neither of these buffers prove sufficient, central banks can of course always act to slow, stop and eventually reverse QE more quickly. The Fed has probably only postponed its taper by a few months, and it can disengage faster in an emergency. Reinvested interest aside, the Bank of England stopped adding to its gilt holdings almost a year ago.

We do see a little more inflation risk in the years ahead, and many bonds continue to price in less inflation even than we have now. But it is not an urgent or dramatic worry, and a carefully diversified portfolio is likely to remain a better investment solution than one dominated by gold or even real estate. In our view, such balanced portfolios should continue to be tilted in favour of ongoing economic growth, which can probably withstand (yet) another bout of US fiscal brinksmanship, the current misplaced fears of a second Asian crisis and – eventually – monetary normalisation.

This was posted in Bdaily's Members' News section by Barclays Bank PLC .