Money to be made from the gold rush for the exit?

Shock horror for gold bugs: a two year low and the biggest two day decline in 30 years.

For the first time in more than a decade there is a genuine feeling that the gold price could collapse like it did in 1980 when the dollar price more than halved in a matter of months.

The equivalent today would leave gold south of $1,000 compared to its 2011 high of $1,920.  As of today, the price is hovering uneasily around the $1,375.

Plenty of people will have lost a packet but could now be the time to position yourself for a future profit?

Predicting the gold price short or long term is usually a thankless task.  How do you weigh up an asset class which offers no income and for which the real economy has little use for?

I would offer these observations, which suggest gold may not follow that 1980 trajectory below $1,000:

• The biggest source of demand for gold is Asian jewelry and Indian orders have apparently spiked upwards in immediate response to the recent falls;
• Despite all the talk of panic and rushing for the exits, most long term investors (as opposed to speculators) have stayed firm and there has clearly being some bargain hunting in the last couple of days;
• The main driver of the 1980 crash was a sharp increase in Fed interest rates.  And I mean sharp - up to 20%.  Such monetary tightening is not even the remotest prospect in the current climate;
• The 12 year bull run has been marked by substantial declines followed by steady recoveries.
• The underlying conditions that have supported the bull run - negative real interest rates and repeated but failed attempts to spark economic recovery by money printing - are firmly in place.
• Central bank buying reached a record high last year.  Once the dust settles Asian surplus countries wishing to diversify out of Western currencies will likely buy the dip.

 But these are just straws in the wind and you could probably make a list of bearish points easily enough.  And the short term is even more unpredictable with fear and volatility abounding. I won't be speculating on a gold comeback from these levels.

More interesting are gold mining shares which are unsurprisingly trading at multi-year lows.

Gold producers' profits suffer disproportionately from price falls as their costs do not fall in sympathy. Indeed runaway mining cost inflation, along with a hangover from over investment during the boom years, had already sent gold mining shares tumbling since before the latest crash.

FTSE constituent African Barrick Gold (ABG) has also disappointed the market by missing its stated production targets for three successive years.  In February ABG reported a. 70% profit decline even before the latest slide in the gold price.

But ABG has no debt and plenty of cash, some of which is due to be paid to shareholders in dividends shortly (it goes ex-div on May 1).  It has very large reserves compared to its much-diminished market value.  Its costs of production per ounce are about $975, sharply up over recent years but less than many in the industry.

A buy at today's £1.65 close (it was £4.50 at the start of the year)?

If you believe the gold price will recover at least partially then maybe.  However it had better recover quickly because otherwise ABG will be reporting losses and scrapping the dividend which will no doubt send its shares even lower.

From our website:  Spanish tax advice

The gym may be your best pension plan

Unsurprisingly there is a lot of pensions insecurity these days.

With economic prospects gloomy and government policy hell-bent on punishing savers, it seems only the really rich and those with a state-guaranteed pension can be confident about their retirement prospects (see Are public sector pensions really gold-plated?).

The odds are depressingly stacked against anybody trying to save for retirement.  There are at least four big hurdles:

1.      Ability to save

As real wages are actually falling that is a tall order for many people even with good jobs to save much at all.  Besides rising living costs, a lot of people these days also have mortgages set to last up to or beyond their retirement date.

2.       Generating investment returns

In the past pension projections used assumed rates of returns like 8% but they look highly unlikely from where we are now.    Take ten year gilts (British government debt) which currently yield 2%.  If inflation continues to run at 3-5% this implies a shrinking pension pot in real terms.

3.      Charges

Read the truth about fund management fees to find out about how layers of sometimes hidden charges can erode the value of your pension pot with devastating compound effects.

4.      Rock bottom annuity rates

These vary depending on a multitude of factors but typically will be around 5-6% without inflation protection or 3% with inflation protection.

From all this you can see how difficult it is to rescue a worrying pension situation in middle age.  Say you are 45, want to retire at 65 and have a pension forecast which falls £15,000 pa short of what you want.  You would need to build up a pot of £250,000 assuming an annuity rate of 6% is available when you cash in (at current rates that might just get you £15,000 pa but without inflation protection).

Assuming investment returns do no more than cover inflation and charges then you would need to save more than £1,000 a month out of post tax, post mortgage income.  Most people who can do this probably are not the ones worrying about their pensions!

What to do?  Certainly don’t put your head in the sand.  Try and maximise your pension contributions and take advantage of any employer-matching available.  Check  to see where the money is being invested and what charges are being taken out.  Twenty years is a long time so maybe inflation-beating returns and improved annuity rates will return at some point.

But another way to think about the problem is what sort of state will you be in when you reach retirement age, regardless of your finances?  

If you are mentally and physically fit and strong then, even if your pension plans have gone awry, you will be able to cope.  Most obviously you will be in better shape to carry on working and therefore earning and saving which is a double win for your eventual retirement as your pot increases and it buys a bigger pension.

You are more likely to feel like working a bit longer if you are in good health and more likely to be a desirable employee.  I know numerous people who work well beyond the classic 60-65 cut off and seem to get more out of the world of work than ever before, perhaps because they feel under less pressure or simply enjoy the continued routine or fellowship that work can offer.

If you are in good shape then you might be able to start a business, work part time (consultancy) or start a different career in a completely different sector (charity, public sector).  If you are feeling your age and in poor health then you are less likely to want to work any more and will not want to try something new.

My thinking is that if I invest time and effort in making sure I am fit and healthy well into my sixties and beyond then I will have options regardless of how my pension works out.

How to achieve this magical state of mental and physical wellbeing in later life?  I don't know but surely regular exercise and keeping the weight off have a big part to playing being "fit for purpose" if you need to work beyond retirement.  So invest in a gym membership as part of your retirement planning.

Spanish business expenses guide

Mining stocks and China's hard landing

A quick update on some comments I made about China's economy in June: China and the miners - place your bets.

It was a time when the argument over China's faltering economy was finely balanced: would growth rates dip and quickly recover (soft landing) or could China be on the cusp of something more serious?  I suggested that buying mining shares rather than China funds - like Glencore and Anglo Pacific - was a good way to go if you were feeling bullish.

Events since, including lower than expected industrial output, export and inward investment numbers, have pushed the debate decisively in the direction of the China bears.

So have mining stocks declined?  Not really.  Glencore and BHP are up 20% and 15% respectively since my article at the end of June.  Anglo American is down but there are special factors including a disputed copper mine in Chile. Anglo Pacific is up 8%.  Iron ore, coal, oil and copper prices are all up sharply.

So in the short term it looks like the correlation between poor Chinese economic data and mining assets doesn't hold.  However stock markets are forward looking and much of the China bad news had been factored in by the time of my article.

The latest rises represent bounces from previous setbacks not renewed optimism.  The bounce has been attributed to a belief that the Chinese government will ease policy to keep growth rates up and especially sanction another slew of infrastructure projects which are resource intensive.  Another factor is a growing belief that the ECB is prepared to act decisively to head-off the crisis in the Eurozone probably by buying Spanish and Italian sovereign debt.

Where now?  In the medium term it's hard to be wildly optimistic about the Euro situation whatever the ECB does.  As for the bigger question of how long can China keep growing at 8% plus it seems that the authorities will pull all the levers necessary even if that means maintaining the economy's hideous imbalances in particular the bias towards wasteful investment (nearly 50% of GDP) in property and infrastructure.

Meanwhile the big miners are scaling back on some of their expansion plans to reduce the threat of oversupply.  Share price meltdown averted?  For now maybe although it doesn't feel like the right time to pile into resource stocks particularly after recent gains.

From our website:  A guide to Spain's autonomo system

China and the miners: place your bets

“A crisis is an opportunity riding the dangerous wind” goes a Chinese proverb.

For investors who want to make money out of one of the century's biggest and most profitable themes - the commodities boom led by China - now is a time of great opportunity and risk.

There is an apparent opportunity because the mining shares that have done so well are relatively cheap after several months drifting lower.  And risk because the cause of the share price weakness, the slowdown in China, could yet end in a crash.

The China-boom-or-bubble debate has been a hardy internet staple on business/investment chat sites for several years.  Perhaps only the inflation-deflation argument has generated more heated argument.

On the one side you have the China bulls who believe the country's thirty year 10% annual growth record is good for another decade or more yet.  They call the current slowdown a blip and claim normal service will be resumed later in the year as government stimulus measures kick in. These include the first interest rate cut for three years and a car subsidy program.

The China bears fret that the incredible China boom is literally that - too good to be true - and that Chinese growth is unsustainable  Just like Ireland, Spain and Japan, a boom underpinned by cheap money and property speculation will give way to bust.

"Dubai times a thousand" was how a renowned bear (Jim Chanos) put it but he said that 2 years ago and, although property prices have come down in some top tier cities, the general crash he predicted has yet to materialise.

I lean towards the side of the bears but it is an oft-observed fact that the economic phenomena that seem unsustainable can persist for much longer than you think.  People have been calling the demise of the US (and Japanese and UK) sovereign debt markets for years.  They may be proved right eventually but you can lose a lot of money shorting something prematurely.

As for the bull case, I have a lot of time for Dr Stephen Loeb and he is in the "blip" corner.  His article "Silver, Copper, Gold and China" states the case for continuing China growth and a recovery in commodities (and miners) very well.

If you are persuaded by his argument and think the commodities boom has a lot further to run, then now would be a good time to back your judgement and buy ETFs which hold physical commodities like gold and copper which have suffered recently.  Loeb is very keen on silver which has a key industrial role in for example solar panel production.

Another option is the shares of mining companies.  Obvious choices are highly diversified giants quoted in London such as BHP and Anglo-American.  In the past I have had profitable dealings in mining royalty holder, Anglo Pacific (AFP), which has recently been marked down due to some specific problems at a coal mine which it will recover from (see here).

Finally I am intrigued by Glencore which always seems to be in the headlines, most recently because of its on-off merger with Xstrata.  It's shares have slid by almost a third in just a couple of months.  The markets have been a bit dubious of this company I think partly because it's profits derive from trading commodities as much as producing them and the trading bit is somewhat opaque.  However there is no doubt that the people who have built up Glencore, including multi-billionaire Ivan Glasenberg, are extremely smart and ambitious.

Buying Glencore would be a triple play on a China recovery, a successful conclusion to Xstrata merger and on the company's management.  Too rich for my blood but the share price, at under £3, makes it tempting.

From our website:  Massive tax rises in Spain for 2012

Spain's Fred Goodwin has sunk the country's credibility

If there was any doubt that Spain is headed the way of Portugal and Ireland (if not quite Greece just yet), the Bankia affair has just removed it.

The country is in dire straits and the public face of the disaster is Rodrigo Rato (roughly translated as Roland Rat) who was forced to resign as boss of Bankia when it was forced to seek a €19bn government bailout.

With strong echos of Fred Goodwin he walks away with a cool €12 million or so in compensation and accrued pension benefits.  He was only at the bank a year and, while he can't be blamed for the property losses which sank the mega-bank (they were accumulated long ago by the various dodgy institutions that were roped together to form Bankia), he is certainly culpable.

This bank had already been recapitalised once when it took the opportunity to raise €3bn from the markets (i.e. pension funds and private investors who have now been almost wiped out).  The bank continually lied to the outside world about the true extent of its losses even declaring a profit of €300m just months before an external investigation revealed the true scale of the disaster.

A parliamentary inquiry and a judicial investigation into criminal charges have been called but the rat will scurry away from the sinking ship unharmed no doubt.

The Spanish public are angry and somewhat scared I think.  They have every right to be on several counts:

- Spain obviously doesn't have the money for the bailout and its European "friends" are not about to stump up

- The scale of the losses at this one bank tells the markets that the dire predictions about the Spanish banking sector as a whole (€200 billions of undisclosed write-offs) might not be far off the mark

- Spain has lots of similar hidden liabilities like the unpaid bills of its regional governments (€37 billion they say but no one knows) and a €24 billion slush fund I wrote about recently (are Spanish electricity bills about to soar?)

- But the worst thing is that the government's credibility is also sunk along with Rato's.  The previous administration encouraged the initial merger and the current one signed off on a much smaller recapitalization only days before the final shocking denouement.

The markets have given up on Spain and the spread over German bonds (the extra interest that Spain has to pay for its borrowings) is now at a record 5,4%.  It would be much higher if the markets were not wary of the ECB suddenly changing course and directly intervening in bonds markets; that is the only thing making Spain other than a one way bet.

This risk premium - la prima de riesgo - is now watched by the public like football scores or lottery draws.  They know that the game is almost up - financial chaos and humiliation is inevitable unless the ECB or Germany come up with some kind of deal.  And fast.

From our website   A guide to Spanish pension benefits

Could a China hard landing end gold's bull run?

Gold has been one of the best performing asset classes for a decade now but recent price declines (it's about 15% down from last year's high) have led some to call the top of the market.

Are they right?  Is there any value left in buying into gold at this stage?  Are the many owners of gold and gold investments like ETFs headed for a fall?

Almost certainly not is the answer but there is a very apparent danger in the short term from a hard landing in China.

To understand why gold will remain in a bull market, consider what has driven gold this far.  Some people crudely characterise gold as an inflation hedge but it's more a form of insurance against monetary collapse and chaos which often leads to inflation.

When governments abuse their currencies and lose fiscal discipline like they did in the 70s it is very difficult to find safe places to put your money. With falling bond and share prices and negative real interest rates at the bank, gold offers a last chance at preserving wealth.

Before the 2008 crash investors bought gold because they saw Central Banks stoking a monetary  bubble which portended some 70s style chaos.  Since the crash worsening government finances and extreme monetary policy have exacerbated these fears and so we have had 10 years of gold price rises without much of the inflation that it is supposed to protect against.

Crucially, on top of gold's appeal to investors as insurance, we have had very low interest rates, often negative in real terms. This negates one of the drawbacks of owning gold - it doesn't earn anything.

Indeed if you want to know when gold is going to peak then the measure to watch is real, inflation-adjusted interest rates particularly dollar interest rates.  If there were any hint that the Fed were going to normalise interest rates at a level a percent or so above CPI then gold would fall a long way in a short time.

But this is not going to happen for a while and the Fed have publicly stated that rates will stay low until 2014.  That will put a floor under the gold price, probably not much lower than where it is now.

The Eurozone crisis makes more money printing likely and is just the sort of thing that gold as an insurance policy is made for, even if in the short term the Euro's weakness is a negative for the US$ gold price (the dollar has been at its highest level for years versus the sickly Euro).

The one cuckoo in the nest could be China. Private sector Chinese demand for gold, like its demand for just about everything else in the last decade, has been relentless and is still growing rapidly.  But a lot of the Chinese economic growth since 2008 has been artificially stimulated by its government, is ill-balanced and unsustainable.

The slowdown this year has been marked and I am sceptical of the soft landing claims.  The papers have been carrying stories like this one about Chinese buyers refusing to take delivery of iron ore and honour commodities contracts - Chinese steel mills defer iron ore shipments.

It is easy to see Chinese demand turning from a positive to a negative for the gold price.  Indian demand, usually a mainstay, has already fallen sharply this year as the economy slows.  But with the financial crisis dragging on with no (happy) ending in sight the overall case for gold is as good as ever.

The truth about fees that every ISA investor should see

It's the time of year (less than a month to go until the 2011/12 deadline) when many people in the UK are thinking about where to invest their ISA allowance.

If you are planning to invest in a fund rather than cash or self-selected securities, then the table on the left (produced by Vanguard - see this excellent guide "The Truth About Costs")) could be more important than any research you do into which funds are likely to outperform. It shows that a fund with high charges will underperform and disappoint in the long term almost however well the fund manager does or however clever you are in selecting a "hot" investment trend.

For the average investor who doesn't follow and track these things, the effect of fund charges are greatly under-appreciated.  0.25% or 1.6% or even 2.5% don't sound very substantial numbers.  A positive bargain actually when compared with say a 15% tip at a restaurant.

The problem is that fund charges are made every year on your cumulative investment, so over a 30 year period a fund charging 2.3% (many do) will take that % of the money you invest in year one 30 times.  And they will take 2.3% of any gains and dividends.  And all the charges they make reduce your capacity to roll up cumulative gains on the investment.

Small wonder that even a 1.6% charge rate can reduce a potential "pot" of £46k to £29k even before inflation is considered and even before tax because it is in an ISA.  And don't get me started on so called Independent Financial Advisers and their fees.  Or "funds of funds" which have two layers of charges.

If you want to find the real scandal of the City, forget about hedge funds and bonuses: it's the quiet, deadly raids that are being made every day on our savings that are the real disgrace.

What to do?

Option 1 - open a self-select ISA with no annual admin charge and pick out 5 or 6 quality stocks with your allowance (perhaps spread the timing of your investments over the year - one every two months) and forget about them.  Apart from the small commission and stamp duty* at the beginning you will have no charges to pay.

Option 2 - pick funds with low charges. Look for a TER* or Total Expense Ratio and remember the difference between 0.25% and 2.5% is enormous.  Any fund with a high TER must really justify itself.

* - note that dealing costs are not included in the TER - they are taken directly out of the fund - so that actual charges are higher than the quoted TER

Final note to anyone unfamiliar with initial charges: never pay them.  Some funds charge up to 5% simply to buy into their fund.  That's money taken upfront and which never earns you any cumulative return.  It is completely unjustified - it's like being charge commission to enter a really expensive shop and spend money there.  Avoid by going to a broker which waives or rebates the charges.

From our website:  Self employment in Spain - the guide

10 reasons why stimulus is the problem not the solution

Last week I wrote that calls for more economic stimulus should be rejected because such measures demonstrably make things worse rather than deliver the boost they are supposed to. I listed 13 separate fiscal or monetary efforts made to stimulate the US economy since 1993 which have left it in a worse state than any time since the War.

Other countries which have run even bigger government deficits and run easy money policies for longer, like Greece and Japan, are in an even worse state.

Despite this dismal record policymakers (most recently the Bank of England with its QE3 programme) persist on trying to shove stimulus down our throats. Few commentators ever seem to question whether these “boosts” actually do more harm than good.

So, in no particular order, here are ten reasons why I think unfunded public spending, super-low interest rates and money printing are economically damaging and preventing recovery:

Sugar rush - stimulus only creates a temporary boost to demand at the cost of storing up demand-destroying effects for the future. One reason why most countries are suffering marked slow-downs now is that the effects of the 2008/9 stimulus packages have worn off.

Prolonging the agony – these false demand rushes do not just benefit healthy parts of the economy, they allow unhealthy, over-indebted and unsustainable parts to limp on: zombie banks, companies and, dare I say it, consumers.

Bad habits die hard – if you look at the way stimulus is supposed to work, it is in ways that are completely contrary to the long term interests of the countries being “helped”: encouraging consumption rather than investment; more borrowing rather than savings. Bank of England policy has been likened to “war on savers” which is just about the last thing the UK needs with a pensions timebomb ticking.

So now Inflation's a good thing? – the monetary authorities are expressly trying to create inflation with their policies and seem to be quite pleased with themselves when they create it. I am less sanguine. The BoE reckoned its first bout of QE generated up to 2% extra inflation. One reason why private sector demand is so depressed this year is high fuel prices which have been particularly affecting retailers. A lot of government spending is indexed to inflation so it makes the deficit reduction harder. Contrary to commonly stated opinion, high inflation doesn’t automatically erode debt. It may do this if wages rise faster than general prices but this has not been the case in recent years.

Leakage – A lot of the demand supposedly created by these stimulus measures leaks abroad in the form of increased imports or by encouraging investment capital to flee to emerging markets in search of better returns. The Chinese bubble that may be about to burst was made in Washington.

Moral hazard – The financial sector knows that every time the markets weaken, the fiscal and monetary taps will be turned on and they will be rescued. This has been done so many times - the term that describes the phenomenon, the Greenspan Put, was coined as long ago as 1987 – that the financial sector has a strong incentive to take ever greater risks because the downside is so limited. Stimulus is one of the main reasons for the “too big to fail” phenomenon.

Confidence trick – QE, fiscal stimulus and lower interest rates are all supposed to encourage business investment, which creates jobs and thus more consumer spending and thus more investment in a virtuous cycle. But if you were in charge of a business, would stimulus policy incentivise you to invest for the long term? Maybe a decade or so go but these kinds of measures have been tried and have failed so many times now that they are counterproductive and cause cynicism and confusion in the business community.

Bucking the market – True free-market believers are a dying breed these days. How else do you explain the lack of criticism, even from supposedly right wing politicians, for probably the biggest and most damaging example of state interference there is - central banks holding down interest rates below their market level. Interest rates are a price mechanism like any other: if you set the price of credit too low you will upset the delicate balance between saving and investing, investment now and consumption later. See this article to understand the theory of intertemporal misallocation which explains a lot of the current crisis: What Spanish Pigs Can Tell Us About Economics

Pensions vandalism – One common aim of stimulus measures of the QE variety is to lower bond yields which also has some nasty side effects for pension funds and retirees buying annuities. Is it really going to help our companies to have to increase the contributions to their pension funds? Will it help demand to impoverish pensioners? See this article from the telegraph There’s Another Fine Mess QE Has Got Us Into

Big Spenders – if you believe that governments spend (and then tax and borrow) too much, then take a look at stimulus as one of the main reasons for this. Look at Spain where low interest rates over-stimulated the economy, falsely inflating GDP and tax revenues thus encouraging the government to spend too much. And when the stimulus wears off, governments have a great excuse to spend and borrow even more to “support” the economy. One Nobel prize-winning idiot even claimed that an imaginary war against aliens would be a good thing because it would encourage the US government to spend even more trillions it didn’t have – Paul Krugman: An Alien Invasion Could Fix the Economy

OK, so this is a mish-mash of ideas and I haven't tried to distinguish between the different types of stimulus. Maybe different countries which might benefit from certain measures at particular times. But in general I believe that governments would be better to concentrate on balancing their budgets, cutting taxes and regulation and leave the economy, including interest rates, to the markets.

From our website: guide to Spain's Autonomo (self employed) system

Stimulus is the problem not the solution

As the world's main economies slow, and in some cases grind to a halt, the calls for governments and Central Banks to stimulate their economies are growing louder and they are starting to respond.

With interest rates already on the floor (in the West at least) and public finances dangerously stretched, it is not clear how governments and central banks can provide much of a lift. But even if they could, isn't it time we accepted that there are limitations to what fiscal and monetary stimulus can achieve?

The idea is very simple: extra government spending, tax cuts, lower mortgage rates and quantitative easing (money printing) all are supposed to create fresh demand in the economy and set off second round effects as companies hire and invest to meet the new demand.

But if that's the cure, why are the patients who have been prescribed it (many times) still stuck in hospital with doctors anxiously looking at the graphs zigzagging downwards at the end of their beds?

Never has a "solution" been tried and failed so often as stimulus. Just looking at the American experience alone we have had, and it's worth listing them, multiple attempts to pep up the economy during the last two decades:

1993 : response to the recession that followed the Gulf War oil price spike

1997: response to the Asian currency crisis

1998: monetary easing following Russian crisis and consequent LTCM hedge fund collapse

1999: open market operations to inject liquidity ahead of anticipated Y2K bug problems

2001-3: Fed funds rate cut multiple times to 1%

2001: Economic Growth Act - Bush tax cuts

2001 (end): Fed injects $100bn of credit post 9/11

2007/8: Fed funds rate cut to effectively 0%

2008: Bush stimulus package

2008/9: QE $1.1tn

2009: Obama stimulus

2010/11: QE2 $600bn

2011: Operation Twist and 2 year guarantee on Fed funds rate

2011: American Jobs Act 447bn stimulus package

Every one of these policies was expressly designed to stimulate the economy and was reported (uncritically for the most part) in the press as a "boost" or as "aid". And every one had a future price in terms of higher debts, either public or private.

After all that boosting the economy should be soaring but as we all know the US, Japan, Europe and the UK are stuck in the mire with massive debts, barely any growth, shockingly high unemployment and banks teetering on the brink.

I will write next time on why I think stimulus does more harm than good but will sign off with some stats from the crisis before this one: going back to 2002 after the dot com bust. The year the Fed stoked up a consumer credit binge and private sector credit grew at an annual rate of $695 billion. A massive debt increase that sowed the seeds of the next downturn and under which the US is still languishing. And what did that buy? GDP growth of $110 billion. Every $6 debt produced a measly $1 of growth. The debts are still with us but the growth long gone.

From our website: Spain autonomo classifications

moral hazard

How to ease the pain of rising energy prices

The last few years have been very unkind financially to anyone with savings in building societies or bank deposits. With rates slashed to the 2-3% mark (before tax) the value of these savings has steadily declined as inflation has risen. This mix of rock bottom returns and high inflation is set to continue for years.

Worse for many people who rely on these savings has been the rising cost of energy - petrol prices and domestic fuel bills have risen much faster than inflation. What to do?

Ever helpful the big 6 energy suppliers have been offering fixed price deals which fix your tariffs for up to two years. A bit rich when they have just raised them 20% - "we're putting up your bills and would you like to lock into paying these rates for two years?". You would rue this if there is a recession and energy prices fall again even if just temporarily (and they have been falling recently).

A better option might be to buy shares in a couple of energy companies. An example would be Royal Dutch Shell B shares (RDSB:LSE). The share price has fallen recently below £20 (it has been as low as £17.68) at which levels the dividend yield is nearly 6% which could be received tax free if you open a self-select ISA. That yield is likely to grow in the coming years as Shell benefits from rising prices for oil and natural gas (which makes up half its output) and a growth program of investment in such areas as unconventional oil extraction and liquefied natural gas projects. The company's most recent set of results show profits up 74% with strong enough cashflow to support the dividend, finance the investment program and leave a very strong balance sheet with little debt.

Double the returns of a deposit account with potential for inflation-beating growth sounds too good to be true. But what of the risk to capital? Protecting the value of the original investment is the deposit account saver's key priority. No one can deny the risk of share price falls. We have just seen some recent market mayhem (though Shell recovered very quickly) and Shell may fall again in the coming months as the oil price softens. Also who can forget the BP oil leak which halved the share price practically overnight (Shell is dealing with a North Sea oil spill as we speak although thankfully on a much smaller scale).

All true but I would argue that the deposit account capital is not as safe as it looks. In fact savings there are suffering rapid erosion is real term and likely to continue to do so as interest rates are held below inflation for several years. At least by buying Shell or similar shares with a proportion of their capital the investor has benefiting in some way from rising energy prices. The risks can be reduced in two ways - buying up shares in stages so that the buying prices are averaged out and diversifying (buying a mixture of shares) through a energy fund or energy ETF, though watch out for charges.

Ignore the media storm. BSkyB's a steal.

It's has to count as a heartening week for democracy and for standards in public life when some (very) bad journalistic practices brought a global empire to its knees. Although bringing NewsCorp to book over the phone-hacking allegations should have happened years ago, it shows yet again why public companies should value their reputation for integrity as their most prized asset.

But as an investor I have been almost as interested in the sideshow surrounding NewsCorp's bid for the 61% of BSkyB they don't currently own. Just to recap they offered 700p a share for the company in June last year; the bid was delayed as it had to clear various regulatory hurdles. In the interim the share price rose to around 850p as the market expected Murdoch would have to pay 900p or more for the big prize.

Now, just as the finishing line was in view, the whole bid is off and may not be revived. The arbitrage specialists who had bid up the share price in anticipation of a quick killing have fled to nurse their losses and the share price is now 705p (BSY:LSE) having gone as low as 660p. Shades of the BP gulf spill and another blue chip share meltdown but this is completely different and a great buying opportunity.

For one thing the BP spill seriously undermined the fundamental value of the company, plaguing it with uncertainty, eating up cash and forcing it to cancel the dividend and sell prize assets. B Sky B may suffer a temporary "guilt by association" reputational knock but its core business is not affected. And what a core business...

Murdoch did not scheme and plan for years to get the bid through for sentimental reasons. He knows the company is superbly well -placed to capitalise on its position as the UK's leading broadcaster. A lot of the hard work has already been done - winning 10 million paying subscribers and investing in its technology, programming and new products. There cannot be a more consistently successful large corporate innovator in the UK. Goldman Sachs agrees that this already profitable company is about to enter a phase of improved cashflow and improved earnings: Goldman rates BSkyB a buy.

There are risks. Some have speculated that News Corp may have to sell even its 39% stake but I find that alarmist. Also the pre-scandal price took account of cost-cutting synergies between Sky and NewsCorp. Longer term there may be a threat to Sky's business model from internet piracy as I discussed recently here We're going to pay for all this free stuff. But the strengths are too numerous to ignore.

The company already yields 3% and trades around 14 times earnings which is very low for a company in this sector, with next to no debt and considerable competitive advantages. What is more, as this article explains, there is the potential for the end of the bid to result in the board of BSB making a huge special dividend to shareholders of up to 20% of the current market value: BSkyB investors expect special dividend if NewsCorp bid fails. Buyers will soon be circling again and the share price is likely to rise in the short and long term.

From our website: Taxation of rental properties in Spain

Has the bears' case against Spain gone down the pan?

It was supposed to be PIGS in the plural not PIG. The smart money was betting on all the Euro area's peripheral economies buckling including Spain and not just Portugal, Ireland and Greece.

As Portugal finally opted to accept a bailout package, the headlines inevitably posed the question "Is Spain next?" The markets answered pretty emphatically "No". Ten year Spanish government bond yields stayed steady at just over 5% as they have they have done all year (for comparison the UK equivalent is around 4%). Traders and investors seem to have been reassured that Spain's economy is in better shape and crucially the government debt in relation to the Spanish economy much smaller than Portugal's (63% vs 83%).

Also the Spanish government seemed to have been shocked into action last year and made some labour market and pension reforms, put up taxes and cut spending and made a start on clearing up the mess in its banking system.

Everything OK then? Of course not, Spain is barely growing (GDP up just 0.6% last year), the banks have a lot of Portuguese debt, the housing market is still a disaster area and unemployment is shockingly high. On top of that the ECB has chosen to put up interest rates by 0.25% which feeds through to the EURIBOR rate which sets most Spanish mortgage rates. By some estimates this, and subsequent rises that the market expects to see, could add 800€ to the cost of the average mortgage. And of course there are the strikes we have seen recently and some big job cut announcements (Telefonica to cut 20% of its spanish workforce). Add in rising petrol prices and higher taxes and Spain is not a bear that is out of the woods just yet.

From the ADVOCO website: Spanish Income tax rates 2011

Japan quake rocks the uranium investment case

It was supposed to be another big "can't fail" commodity play like oil and precious metals, but since the Japan earthquake sent powerful shocks through the nuclear power industry investors who bought into uranium have cause to regret.

Before the horrendous disaster in Japan and the subsequent radiation leaks, I was seriously thinking of getting some, er, exposure to uranium. The bull case seemed pretty much irrefutable the more I looked into it:

- emerging market energy demand is growing remorselessly

- in particular, growing car use is making it ever more likely that the oil price will go stratospheric and usher in the age of the electric car

- if the world pays any attention at all to global warming fears, some of the new generating capacity will have to be nuclear. Many countries including the UK, India and China have nuclear expansion slated.

- once nuclear power capacity is built it will consume uranium for decades - the economics and science of nuclear practically lock in demand for uranium whatever the price (as was shown in 2007 and in the 1970s when the price was more than double its current level).

- one of the key sources of uranium to supply nuclear plants today is recycled material from decommissioned warheads. This is a finite source and will need replacing by new mining within a couple of years.

Lucky I did not pile into a uranium investment such as the large Canadian producer Cameco. The uranium price fell by 27% after the nuclear emergencies in Japan became news and Cameco's share price dived. Unsurprisingly given that nuclear has always been vulnerable to safety fears and is in any case always going to be a controversial choice of new power given how expensive it is and the issues surrounding nuclear waste disposal which have never been resolved. Germany has resolved to get rid of its nuclear capacity much earlier than planned and even China has paused its building of new plants.

Some sense a buying opportunity and indeed the uranium price has since rebounded somewhat. China and India are unlikely to scrap their nuclear plans altogether and in some ways Japan was the supreme "stress test" of nuclear power: if a Chernobyl was avoided in such extreme circumstances maybe that shows they are a risk worth taking. Just don't built them on the coast in an earthquake zone!

The real long term winners will be natural gas and renewable energy investments. The disaster will also underpin the already sky high oil price. Shares such as Shell, which is expanding and gets half its output from oil and half from gas, should be good long term plays even though their share price is close to an all time high.

From the Advoco website Contracting in Spain

Good news: the FTSE's falling!

For anyone thinking about what to do with their ISA allowance or are just looking for an alternative to the depressing returns available at their local building society, recent stock market events should have given plenty of food for thought. On the face of it, with the FTSE (and most world stock markets) falling, one thought would be - don't bother with shares, they are too risky. Look a bit closer though and you might come to a different conclusion.

The FTSE 100 has had a good run since the financial crisis, up 69% (84% if you include dividends reinvested). Share prices have fallen sharply though over the last few days perhaps on fears that the oil price rise, goepolitical instability and Europe debt fears will drag on markets. The Japan earthquake has taken share prices lower too. That suggests share prices have had a good run and the risks are on the downside going forward.

Maybe, and I don't propose to go into all the arguments here but I would highlight some other bits of recent news from the UK stock market concerning dividends:

** Morrisons announced it would be increasing its divi by 10% for each of the next three years and returning 1 billion £ to shareholders via a share buy back.

** Prudential announced a 20% rise in its dividends

** AMEC, the energy services and engineering company, announced a 50% hike in its dividend

If you focus on the underlying income that shares generate rather than share prices, the news is mostly excellent and actually has been very good over the last decade.

People often make a comparison with share dividend yields and bond or bank deposit interest. Currently you could get 2.5-3% from bank accounts and around 3.5% from the FTSE. The argument goes that shares are risky so they should be yielding considerably more. On that basis you should wait until share prices fall back and yields rise; in the meantime "play safe" in cash.

But I would argue that the comparison is false. Interest on bank deposits is static (or falls when unscrupulous deposit takers quietly lower their rates and hope you don't notice) whereas dividends should rise over time, if you pick shares in the right companies.

As an example, look at Tesco PLC which in 1998 was paying around 4p a share in dividends. Since then the dividends have grown 10% a year on average to stand at around 11p in 2010. Tesco yields around 3.25% but the key point is that if it continues to grow its earnings and dividends by anything like the rate it has achieved in the past, the yield (particularly with dividends being reinvested in more shares) will easily beat interest bearing accounts.

But will companies like Prudential, AMEC and the supermarkets continue to grow particularly if recession returns and some serious global crises unfold? I would argue that certain companies with pricing power (strong brands and competitive positions) and in key sectors (utilities, energy) should continue to grow their earnings even in an uncertain economy. Partly this is because they are good defensive companies we can't live without, and partly because the dividend only gives part of the picture. Back to Tesco - they may pay a dividend just over 3% but actually they earn more than twice that amount and that additional money is invested back into the business to underpin future growth.

So when you see share prices falling remember that it could just mean that a great source of growing income has just got cheaper. This certainly is the view of The Sunday Times Money editor Kathryn Cooper who wrote on Sunday: "high quality blue chips with solid dividend yields have been out of favour for three years; surely their time has come".

Spanish tax forms explained

Electric cars: pie in the sky or investors' heaven?

Electric cars have been the stuff of fiction and speculation for as long as I can remember but, in practice, have posed little threat to the standard gas guzzlers. There are over 600 million combustion engine cars in the world but only a tiny number of electric cars, a fact which is unlikely to change dramatically despite an apparent surge in interest from governments and carmakers.

There are issues of consumer resistance, battery technology, recharging infrastructure, price (including uncertainty over government subsidy) and economies of scale. But there are plenty of interesting initiatives out there : Denmark and Israel are building a network of charging points and "switching stations" where you swap your flat battery for a charged one in less time than it takes to fill a tank. The 2011 Car of the Year was the electric Nissan Leaf which the UK government is trying to get manufactured in the UK. Spain is aiming for 1 million electric or hybrid cars by 2015 though there are doubts about electric car sales in Spain taking off to this extent. One of the main issues in scaling up electric car fleets in Europe is the lack of a common standard for plug sockets.

But despite all the doubts, there is a future for electric cars simply because the alternative of burning through the planet's oil is not going to be viable for much longer. Exhibit 1 - oil price back over 100$ despite a weak economic recovery in most countries. Exhibit 2 - China. Already the world's biggest car market and growing at 50% (and it has a long way to go - only 2% of Chinese own cars). Exhibit 3 - other emerging markets. As India and the rest follow China's path their middle classes will want cars just like everyone else.

Yes, there are bio fuels, hydrogen cells, liquified gas and other alternatives but I suspect that electric will be the biggest part of the solution. In 2010 the Chinese government threw its weight behind the electric car and aims to be the world's biggest producer by 2012. This will be decisive. Which of course means a massive increase in the need for electric power generating capacity which in turn suggests some investment themes:

- forget the prospect of windturbines and solar powering all the new cars; the world will have to turn to the fuels it has in abundance to achieve the necessary scale. That means coal and gas whatever the carbon consequences might be.

- the electric grids themselves will need expanding and upgrading and will be even more important to the economies they serve. This will mean governments have to allow these monopolies to charge inflation-beating prices for decades. Great if you think like me that stagflation is the main threat and need to find good dividend payers (see what do with your savings in 2011)

- presumably controversial nuclear power will have a role. Uranium miners should benefit though their share prices have already surged in recent times.

- battery makers and battery technology companies but you need to do your research. Warren Buffet, the greatest investor of all time, is a fan - see http://www.rationalwalk.com/?p=11079

This is just a thought to tuck away for the long term (and a fairly obvious one at that) not specific investment advice - a lot of related shares in this area have shot up recently any way. One FTSE share that I would be quite keen on for a variety of reasons as a long term play is National Grid.

Latest from the Advoco website: Spanish income tax rates 2011