Skinflint's City Diary

Nephew Wilde, who ran a share tip COlumn in this paper, pulled his readers out of the stock market before the collapse and in December left for the Far. East. He's just telephoned me for -what -he calls 'advice'; and which I suspect means that he has moved from the Club for reasons of economy and is lying in a vest on a string bed in a bamboo thatched hut at the roach-infested end of town. He telephoned — collect naturally — and surprisingly asked for stock exchange news and what the London view, i.e., yours truly's was of the prospect for gold and equities. 'The conversation went like this: Wilde: Historically gold rises when the dollar is weak and falls when it is strong. With the dollar in good condition will you explain to me why gold has risen?

Skinflint: Gold went up no more than the prices of basic commodities. If you compare the gold price rise with the rise in the US commodity index, you will notice that gold is only reflecting the rise in everything else.

Wilde: Hasn't the gold price rise also been due to the so-called gold-bugs that I've read about, anticipating more inflation as well as industrial and economic disruption through the high oil price?

Skinflint: Yes, exactly. The pressure from the French, and others is strong to raise the price of gold, which is still $42.22 an ounce for monetary purposes, to say, four times this level, which is roughly the free price, to produce a $100 billion excess in the non-communist world. The Germans are not keen because they do not have much gold, just a lot of cash. Their treasury had a surplus of $30.billion at the end of 1973, The Germans know if a lot of other countries have gold which they can use monetarily as reserves, that they will run big deficits with them and discharge in gold. This would allow these countries to solve their balance of payments problem at Germany's expense.

Wilde: Is gold buying still risky now that the price has fallen back so much?

Skinflint: In my view it certainly is risky at any price over $100, and even at that level I'm not too sure. In the Korean-war gold went to $53 and fell back to $36. In 1968 it went up to $45 and then back to $35. The rise in the price of gold has been due to inflation, particularly commodity inflation and the bad stock market, as well as, of course, oil. Just as these factors raise the price of gold, so their solution will lower it. Commodity prices are falling and will possibly fall further. North American wheat crops are likely to be the biggest in history. Metals will fall because of the severity of the slump in car manufacture.

Wilde: Apart from the fringe bank collapse which was probably well deserved and the fall in the value of property, how do you expect profits in industry to hold up in 1975?

Skinflint: I welcome the collapse in share value and property prices: if narrows the reverse yield gap by bringing yields up nearer to those on,government stock. I-should have preferred it the other way round: gilt yields down and a low bank rate, but there it is. The profits reported by what I call the organic companies — those that actually do something — were illusory, since a large proportion was due to stock gains, sly price increases and so on, stemming from inflation. After paying taxes on them the business has to find the money to buy more raw materials at the higher price level.

Wilde: Is the stock market going to fall further this year?

Skinflint: A lot of investors do not realise that the stock exchange and company profits do not move together. Profits are generally still rising when the market starts to fall back, and vice versa. Most recent recessions, you will find, demonstrate that the market started to go up atthe start of the down turn.

Wilde: Well, if that's right, why hasn't the market started to rise? I know that you'll say that the oil crisis is something new. That investors are in the-air, and that there will be a longer lag. OK then, what makes you so optimistic, which I expect you rather irritatingly are?

Skinflint: We are agreed that cars and consumer durables are down. Property and shares are down. Speaking from a personal investment position these are bull points. There are a lot of. cheap opportunities, and any time I have been able to collect it has always been from the bottom of a slump. Cars are a worry in a pump-priming Keynsian sense, but the local Social Security Office is the ultimate up-primer now. North Sea Oil should help us nationally, and its infrastructure help business. New expenditures in the search for energy will do more than the consumer-durable trade in stimulating investment in productive equipment.

Wilde: So you are saying that 1975 is going to be a good year for real business, though I notice you avoid making a judgement on the stock market.

Skinflint: Yes, 1975 is going to be a humdinger. Particularly because the year will be full of innovative change, and change is good for industrial investment. If you are thinking of coming back to country, get back into business; preferably a medium or small busi,ness that actually does something. Business is beginning to understand inflation: writing escalation into contracts, etc.

Wilde: What about a general election and Wedge Benn?

Skinflint: Well, what about them? Coming out of the EEC will be good for business, but the issue will be too blurred and long-drawn-out to help immediately. A strong Labour .government will be bad for the share market, but not necessarily for business. Wedge-Benn may be bad for gilts The will be printing an awful lot if he means what he said), but he'll be good for the businesses he leaves alone, since a good deal of nationalised investment and trade protection will be part of his platform.

Wilde: Well thanks, I don't know if I'm any clearer, but whilst I'm on the line, I wondered if you would mind. . . Just to tide me over . . .?