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Angus Murray, CEO, Castlestone Management Inc

Comment: The rise of the unleveraged real asset & the N11

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Castlstone Management CEO Angus Murray (pictured) argues that in a highly volatile world, real assets and the N11 emerging economies will continue to outperform all other asset classes…

The European debt crisis and the raising of the US debt ceiling indicates that the Western World has not got its finances under control. These Governments need short term funding to keep unemployment under control and the only solution is to create more money. In Europe this is being used to bail out ailing economies such as Portugal, Greece and Spain and in the US to move towards QE3. The upshot of all of this is that the value of money is falling so and we believe that owning unleveraged real assets is the only solution for savers and investors.

The holding cost of Gold is driving the price to new heights. An i-phone sized piece of gold is worth USD50,000 – the storage of the equivalent value in oil is out of the question for most of us. Globally, acceptance of owning gold in your portfolio as an insurance policy is growing. Added to this is the strong bias towards owning gold in the emerging middle class populations of India and China.

This leads us on to the next opportunity in the form of the N11 emerging economies. The increased debt burden in the Western Economies will continue to lead to volatility in equities. But the second tier of emerging economies, the N11, are unburdened by Government or personal debt and are experiencing a re-rating. Investing in the equities of strong companies in these markets is protection against the vagaries of the Western markets.

Behind all of this is our belief that unleveraged real assets are linked to the real economy. If you have more money in the economy then the value of unleveraged real assets must rise. However, we had the foresight to recognise the difference between a leveraged real asset, like property and an unleveraged real asset, gold bullion or art. Property has two leveraging factors – how much a bank is prepared to lend and what interest rate you pay for borrowing cash. If the bank lends three times your income with an 8% interest rate then you have one asset valuation, but if the bank lends you 10 times your income with a 2% interest rate, a very different valuation is on offer. This leverage doesn’t affect gold bullion. Back in 2003, we also differentiated between the devaluation of money and inflation. The devaluation of money is noticed every day by consumers as their food, petrol, rates and clothing cost more year-on-year, while CPI and RPI are generated statistics that are open to manipulation. This is as true today as it was back then.

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