Should Commodities Still Have a Place in Your Portfolio?
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Welcome to Merrin Talks Your Money, the personal finance edition of Merrin Talks Money. In these bonus podcasts, we talk about the best strategies for making the most of your money. I'm Merrin Summers at web, Bloomberg UK wealth editor at large. And with me, senior reporter and author of the Money Distilled newsletter, John Stepek. Back from holiday for a change. Hi, John. Yes, I know. Back for once. Back for this week only. This man never stops going on mini breaks. Are you away next week too? Well, tell me I haven't decided yet.

Okay, fair enough. Fair enough. Right, listen, while you've been away, the questions from listeners, they just keep coming in. We've got a little bit of a backlog of questions and comments from our listeners that I think we really do want to get through because they're kind of interesting, I think.

Yeah, I mean, the readers are a thoughtful bunch and I would expect nothing less from people with such excellent taste. I know. And what I particularly like about them is that mostly they agree with us. That's a big positive. Remember, if you email us, we're likely to answer your question. If somehow there are hints in it that you're already on our side with most stuff, we're good with that. Right. The first one is exactly in that vein. It's from Jonathan.

He enjoys listening to our show. That's great, Jonathan. Keep telling us that. And he wonders if we think it's a good idea to be overweight in commodity stocks at the moment. I am torn between the idea that tariffs will cause prices to increase globally as countries work to reshore supply chains or...

that the possibility of an imminent stock market crash due to the 21st century equivalent of Smoot-Hawley will cause all stocks to collapse. Well, Jonathan, you may be overthinking which one is more likely, or is it better just to buy gold and wait for it all to blow over? Now, the first thing to say is that John and I, we do not give

advice. This is not an advice podcast. I'm the hard push to find any advice podcast, actually. So we cannot tell you exactly what you should or shouldn't do. Obviously, we're keen on gold. We like everyone to have a little gold in their portfolio. You know, this is the apocalypse hedge. And given that you never know when the apocalypse might come, you might as well have some.

Otherwise, I think I would say please go back and listen to our podcast with Ed Conway, which is not necessarily about investment in commodities. It's a really good overview of what makes this market tick. And then I would say that we are going to be doing in the very near future a full podcast on commodity investing itself. So that is there.

Do both of those things. The other thing to say is that in general, it is true that commodities have a great record as a diversifier and as a protector against inflation. So if you look back at that period before, say, 2007.

commodities had a pretty good positive annualized return. Post that, when we moved into our low inflation era, you will see that commodities had a pretty lousy annual return, negative actually from 2007, that decade on. So it used to be that everybody had commodities in their portfolio. It was expected

it along with equities, bonds, commodities. You have them in there as your diversify, your inflation protector. That idea has fallen away over the last 10, 15 years or so, largely thanks to the appalling return that you have got from commodities. We are now moving into a new era. So it is exactly the right question to ask. Should you now have commodities in your portfolio? John, what do you think?

Yeah, I think the other point to make is that obviously there are differences between commodity stocks and commodities themselves. I mean, as you can see from the gold miners and gold, for example. And also, I would be wary, ever so slightly wary of fretting too much about the macro picture when it comes to your own portfolio specifically.

So the question of, you know, are tariffs going to raise inflation or are they going to cause an actual stock market crash? I mean, they may not actually do either of those things. And even if they do do one or other of those things, you don't necessarily know how you should be positioned for betting on it.

But I think in the longer run, think these things through and also if you are going to look at mining stocks or energy stocks, then consider their valuations relative to their history rather than is there going to be inflation or is there going to be a massive disinflationary crash. I think that's what I'm getting at. Focus on the stocks and the business rather than what's going to happen in the future.

And the other thing I think is really important to say about commodity prices enhanced by extension, maybe about miners, is that just because commodity prices are rising and doesn't necessarily mean that they will keep rising or stay high. One of the things we always say in commodities is that the solution to high prices is high prices.

Because high prices incentivize increased supply and you get increased supply. And then of course your prices come down. It's a very, very cyclical business to be in. There is an argument, is an argument, I've made it myself, that high prices may not be the solution to high prices in quite the same way in the current environment because of the environmental movement and very, very hard to open a new mine now. Used to be relatively easy. You want to dig a hole in the ground, you dig a hole in the ground. But

these days you want to dig in the hole of the ground, you've got to ask an awful lot of people for permission first. So the amount of time it takes to get permission to open a new mine has moved from, you know, maybe a few months, year or two into many, many, many years. So it's quite so easy to say high prices will incentivize supply and bring down high prices as it used to be. And also, of course, on the other side, you have rising demand for all sorts of metals and commodity products in a way that you didn't

previously because of the energy transition. So basically, my point is there is so much going on in this sector that we're having a dedicated podcast for it, and you will get that podcast relatively soon. So hang on for that. But as I say, well, maybe our answers aren't ideal. Great question and the right question to be answering right now.

Right. The next one is really easy, actually. And it's one that is asked quite a lot at the moment. Hi, Meron. Just a thought. At the start of the Industrial Revolution, I wonder if people would have questioned the wisdom of investing in steam-powered machines, very expensive, dangerous, unreliable at the time. Assuming the world will have to change away from fossil fuels and assuming again that the solution will be electricity from renewables coupled with hydro for storage and nuclear for baseload.

Is there a parallel here with the start of the industrial revolution? Will earlier doctors be in stronger positions later on? Now, I'd be really interested to hear John's answer to this in a minute. But my answer is no. No, I don't think so. This is completely

different to the Industrial Revolution. The Industrial Revolution was more of a moving forward thing. It wasn't government mandated. It was market driven. No subsidies here and no forcing of anyone into anything. Simply a natural progression of technology. Now,

Now, what we're doing here is completely the opposite. As we said several times on this podcast, this is an example of something that we have never done before in history, moving from a very dense and efficient form of energy to a much less dense and less efficient form of energy.

no certainty that anything that we're doing right now is putting us on the right course with renewables and with the mix that we're using, et cetera. So my own guess for what it's worth is that the late adopters are more likely to be the winners than the early adopters. Let someone else spend the money to figure all this out.

which is one of the reasons, by the way, that I think net zero or a short time serum on net zero might be something of a disaster. I suspect that's not the answer you expected. John, have you got a different one? Possibly a more popular one? You're right. We're kind of going back the way technology wise. And that may be fine. You might think that that's what we have to do in order to save the planet, etc, etc. That's not the point. And the other thing is that

Renewables aren't like oil or whatever. You're not sitting in a big chunk of wind the same way as you're sitting in a big chunk of oil that you can then flog to someone else. There's no scarcity value there, all of that sort of stuff. We also keep talking about this in the sense that we will have enough energy to replace where we are at current levels, but what we really need is energy abundance.

And so even if you could get to the point where we can generate all of the electricity that we need currently from renewables without the grid breaking down, etc, etc, etc. What you want to get to is a point where we actually don't need to worry at all about how we're generating electricity or the cost of it because there's so much of it that we're going to have enough to do whatever we want to do. And we're probably not going to get there with renewables.

Right, the one area I would say is, say you're living somewhere like a kind of village in a very deprived part of the world, like in the middle of Africa somewhere, and you start creating grids from scratch as opposed to trying to adapt existing ones.

and your standard of living is currently very low anyway. I can see how that could possibly be a more interesting area where the technology is being adapted, where you're kind of leapfrogging a certain thing. Because perhaps if you started with decentralised grids, then solar in a very sunny country, then solar, for example, would be a much more feasible solution. So that's where I would find it more interesting to look on the basis of this question. But long story short, the answer is no.

Yeah. Okay, good. Well, we agree on no then. I recommend going back and again, listening to the podcast we did recently on nuclear, because I think Jake, one of our guests from Blue Energy was incredibly compelling on this. He was very clear when he said, look, we've got to stop this hair shirt nonsense. What we really want here, the goal must be more energy and we should be using more energy because that's where prosperity comes from. And we have to find a way to

to have more access to energy all the time, constant abundance, not to constantly be talking about how we need to restrict our use of energy. And that's what I mean when I say, you know, we can... This is what John just said. I'm repeating you, John, but you're so clever. I can repeat you, right? So when I say that...

maybe we are going down the wrong path with the mix that we're trying to find at the moment. It's a mix. And when we talk about it, we're talking about reducing our energy use, constraining our energy use. And in an ideal world, when we wanted to have better living standards, be richer, be more innovative, more active, we would be looking for somewhere to have more energy. Thank you, Mike, for getting in touch. Onwards.

Wealth taxes. You asked listeners to contact you about wealth taxes that we had overlooked and we thought we got a pretty good list, but there are always more. This one is, isn't inflation the real wealth tax? And as I will immediately say that the answer to that is yes. And we have talked about this quite a lot, which is why we talk about capital gains tax, of course, as being a wealth tax, because in the end it's only taxing inflation and inflation itself works like a wealth tax. So our

Jeff elaborates, if ordinary working people get 10% higher wages and RPI rises 10%, then isn't your store of wealth...

even in assets very hard to value, like private companies, are out with 10% less. And by the way, debt divided by nominal GDP falls 10%. House prices become 10% more affordable. Traditionally, gold has been the most obvious way to hedge inflation, and gold coins are CGT-free, so doesn't the surge in gold from $2,000 to $3,000 indicate inflation ahead? Gosh, there's lots of questions in here. If inflation hits 10% over the courses of Labour government, how many Labour voters would complain? Quite a lot, I think. Surely, poor Rachel's

obvious choice is inflation. Now, again, we've talked about this a lot on the podcast over the last few years because classic financial repression is exactly that, to make sure that inflation is higher than interest rates. So gradually the value of our public debt and private debt is eroded and

but at no obvious cost to the government. But of course, the obvious cost is to individuals whose wealth and effective income falls. So the answer to that is yes. I mean, there are a few ways to deal with very, very high levels of debt. You can create a great GDP growth so it becomes a smaller part of your GDP naturally. Hands up who sees that happening over the next four or five years. Yeah, John has not put his hand up. You can do that. Otherwise, you can find a way to default on it somehow.

And you can have a real default where you simply say, yeah, you know what, just not going to pay anymore. You can default on your promises. And this is what Russell Napier, one of our regular guests, talks about a lot. It is a kind of default if you default on your promises to your electorate, i.e. no more pensions, no more winter fuel payment, less welfare than you were expecting. Oh, no new roads, no new reservoirs, etc. That is a type of default.

And the third and the easiest default is default via inflation. So you simply make the debt that you have to pay people back worth less. So is it the obvious way out for nearly all Western economies? Absolutely.

Yeah, I mean, but I suppose the thing is inflation does have to be higher than interest rates low. And at the moment, that's actually not the case, which obviously does then beg the question, well, what is the next step going to be given that, I mean, right now, this very week, we are seeing an element of panic everywhere.

or a very slow panic creeping into government bond markets across the world. Moody's has downgraded US Treasury bonds from AAA to one notch beneath that. And I mean, on the one hand, it's not a big deal. On the other hand, it's actually a very clear signal that actually the government debt is no longer anywhere regarded as a safe haven. And the solution is potentially...

that they start printing money again to try and suppress long-term bond yields or something along those lines. But yeah, we'll have to see what happens. But I think that inflation is the way out and that's what they'll go for. Brilliant question there from Jeff.

This is an interesting question, this one, isn't it? It is. The next one is really interesting, but I'd actually say, John, this is the most depressing question I think I have ever received in our entire history of working together, which now is heading towards two decades. I'd say that this question is the one that makes me feel...

More than ever that we have made an absolute mess of our tax system, of our society, of our feelings of ambition. Everything's absolutely miserable and I don't think I'm over-egging this. So here we go.

I am 35 years old and earn around £100,000 a year. Well done. I am married with a very young daughter. Also well done. My wife doesn't work, so after tax, pension and rent, that salary doesn't afford a particularly lavish lifestyle. We have a decent amount of savings, 10% physical gold allocation. Hooray! 20% cash, 70% equities. So we are financially secure. Again, well done. This person sounds like they're doing really, really well. You read that first paragraph and you're like, well, hey, go you, right? Yeah.

So here we are. Here we get to the bit that makes me just so sad. I'm at a bit of a crossroads where I'm having doubts about continuing to work such long hours. He works at a PE-backed company. Yeah, we know about those. Listen to past podcasts on some of our feelings there. Anyway, on my current career trajectory, I would expect I could increase my earnings to maybe £150,000 after a few years. Not bad. But equally...

I'm sure I don't have the right talent or abilities to get to the very top and earn the big bucks. Self-knowledge also, well done. Alternatively, I am confident I could move to a new job, rest on my laurels, never leave past 5 p.m. and likely earn 60,000 pounds or 70,000 pounds. Do you know what? There's a job in the public sector just waiting for this man.

So onwards. My question is, with all this noise about the dreaded tax cliff at £100,000, and particularly with young kids, does it make more sense, financial sense, to just give up and coast? Everyone see why I'm feeling a little low here? Because the answer is probably yes.

Isn't it, John? I'm not sure that the answer is yes. Isn't it? Isn't it? Are you sure? If you live in a world where every time you turn around, you are taxed, when you're near that cliff edge, and you've written about this before, go back and find John's stuff on this, where you're near that cliff edge where a raise might actually mean your take-home pay falls, falls, when you're looking around you and you're sitting...

what your tax money is spent on and you'd like to spend some more time with your children and you're fed up with working for a PE company that, you know, took your company over and is now ripping out the costs, planning to list it with masses of debt, et cetera, and you're looking around you at lots of people who maybe don't work that much, people who work from home every day, people, all this kind of stuff. You're looking around, you go,

I'm the idiot here. Maybe I'll just stop and coast. And so the incentives are,

The incentives, financial incentives suggest that maybe that's not the worst idea. And you and I would say, well, hang on, where's your ambition? What about your future? Maybe you're wrong. Maybe you won't just get to 150. Maybe you'll get to 200. Maybe you'll be CEO. Maybe this is hugely satisfying. And maybe it's true that just this bit of the beginning here with young kids and hard work and long hours, et cetera, this is a tough bit of life. You know, work on through, push on through, and it'll be great on the other side. I mean, maybe we could say that, but are we right?

I take your point and I take his point and I understand how he feels. They've sort of been in a fairly similar position but well first things first so the tax cliff at £100,000 it really is important to understand a few things about that. You only lose money if you lose your free childcare. Now

This chap has pointed out his wife doesn't work, so presumably she's looking after the kids, so they're not presumably paying for childcare. Now, if my assumption there is wrong, then yeah, the £100,000 cliff really matters. But as it stands, once he earns over £100,000, he's going to be paying away between, yeah, I mean, he's only going to be earning between 30 and 40 pence for every pound that he takes home up until he gets £125,000.

But the thing to do with that then is presumably the company he works for will offer salary sacrifice. So he should ram the rest of that into his pension to stay below the £100,000 mark. Seeing as I'm assuming he can afford that if he's planning to coast. For proper sort of discussion of this, I'd need to know what...

is kind of plan b what is it's like so why do you want to coast you know why do you want to you know is it spend more time with your your young kids but then yeah i can completely understand that but also your daughter's only going to be young for the next five to ten years you know how how long are you going to be at home for and then you're kind of you know whatever you turn 50 you're sort of sitting there going i say i'm fed up um in my you know

whatever this job is that's going to pay him 60 or 70k. I mean, I'm curious as to what that is. I mean, there's a part of me that thinks maybe you should be going and finding, getting a sense of what is something that's going to press your buttons if you're feeling financially secure. Oh, Sean, are we getting back into the world of find your passion? No, find your passion, but you've got to find something to do with your life for the rest of it. Tennis, golf. You can't semi-retire at the age of 35. Are you talking about semi-retiring? You're

talking about doing a nine to five job like most of the population or a large percentage of the population how many jobs are actually 95 especially ones that pay 60 or 70 those jobs don't actually exist they don't exist I don't know I mean I tweeted the other day that I had telephoned the TVLA

14 times in one morning in a desperate attempt to get it answered. And every single time I got a response saying that they had the unprecedented level of blah, blah, blah, blah, blah. I rather suspect there's an awful lot of people sitting behind their phones who work under 9 to 5 a day. But, you know. I agree. But I don't think any of them are getting paid 60 or 70k. I mean, like, honestly, I do think that's a slight issue. I think a lot of people, because also a lot of people who are listening to this will be like, 100k? That's a lot of money. Yeah, yeah.

And I told you he's right. It is not a lot of money split between. I mean, and also, look, he's still renting. I mean, that is another issue here. I mean, I'm assuming at some point that he wants to buy a property. Maybe he doesn't. Maybe he's comfortable renting for the rest of his life. But that's another reason why. He's confident he can get one of these jobs at 60 or 70k. So take him at his word. Yeah.

Take him at his word. So, you know, after taxes, income isn't going to fall massively. And maybe his wife will go work part time and then they'll get the child care.

Yeah. I think we might be-- again, we're overthinking. We're overthinking. We don't know enough about those circumstances. But I just find it very depressing that this thought is even in people's heads, that the system feels stacked against people to the extent that their ambition is stunted. I mean, the fact that he's asking-- you're right. The fact that he's asking is depressing. And also, at the end of the day, if he thinks he's achieved escape velocity at this point,

then actually the point at which your income and your lifestyle, your income's outstripping your lifestyle and you know your lifestyle's not getting more expensive, then absolutely fine. But I just think also maybe he's just feeling down.

Oh, for God's sake. Because he's pissed off at his job. And he's got young kids and you want to see them. He didn't come here for life coaching, John. Sometimes that's when you really need low-met. Okay. All right. Well, anyone else who would like life coaching from John, do send your questions in. I was starting to start more on Substack in a few weeks, clearly. Why not? Right, I'm going to leave that one behind because I'm still feeling stressed about it. Bertrand, thanks so much for getting in touch. One more for today.

This is about, as someone starts their question, is exactly the right thing. I like your podcast greatly. Thank you very much, Paul. We're very keen on you too. And he particularly wishes that the government would listen to our podcast and others like yours. I don't know who has these other ones like us.

So don't listen to those. Just listen to these. I hope Labour listened to your well-made anti-wealth tax arguments. You asked for other wealth taxes. You missed VAT on school fees, which is a notable one. I mean, that's interesting, actually, isn't it? Because there were numbers you're showing that far from the trickle of students having to leave the private sector for the state sector, there's so far around 13,000. That's an awful lot of new pupils that the taxpayer has to stump up for.

VAT is effectively a wealth tax since wealthy people buy a lot of expensive things. I was pleased you mentioned the first year registration tax for expensive and polluting cars. Don't forget there's also the additional £500 a year road tax. I thought we mentioned that. Maybe we didn't. For the first five subsequent years, which is foolish and singly makes me not buy a new car. Fair enough.

Stamp duty on expensive houses is ludicrous. Again, we have talked about that and I actually put in my newsletter last week. I was looking at it and I was thinking about Americans buying houses in Edinburgh, which I'm not sure they are, by the way. There are a lot of expensive houses for sale in Edinburgh at the moment. I looked up some of the most expensive and then I looked up what it would cost in the Scottish equivalent of stamp duty.

to buy one of these houses if you already own a home elsewhere. And on some of these expensive houses pushing the 5 million mark, the stamp alone, alone, is close to a million quid.

That's surely unsellable. So why would you do this? Who is going to hand a million pounds over to the Scottish government in cash on the day of transfer purely to be able to buy a house in Scotland? Why would you do this? You could get yourself a golden visa in America. You could get yourself an awful lot of stuff, John.

Anyway, the loss of personal allowance between £100,000 and £120,000 is another foolish tax coming in before the 45% top tax rate at £150,000 disincentivises people to work more in order to avoid the tax through larger pension contributions. That's what our last caller was saying. Exactly what the last guy was saying.

and then there is the removal of the interest allowance for those on higher and top rates of tax. These are all wealth taxes, and he's right, there are. I mean, as I say, you know, you can't go out of your front door without being taxed in the UK anymore, and the wealthy are taxed at every turn. I'm quite interested, I don't know, we've been watching this whole

business of people saying that the wealthy and the high income are taxed much less than they used to be, etc, etc. And you may have seen some of the charts doing the rounds showing that this is absolutely not true. In fact, the wealthy and the high income are significantly more highly taxed in the UK than I think they might ever have been. And

And the low income are taxed significantly less than they've been for some time. And the truth is that they used to be. Well, you know, we talk about these very high income tax rates. They were at various points in the 70s and dividend taxes, etc. But there were many, many more loopholes than there are now. So now when there are taxes announced, people actually pay it. Whereas back in the day, taxes were announced and people go, I don't think I will. Yeah. And it was also easier to hide.

You know, these days everything's digital. I remember someone telling me about whenever there were exchange controls, and this is a minor thing, this was when you couldn't take money with you on holiday. And they were talking about some kind of cousin or uncle of theirs that had just stashed a load of notes in the hubcaps of their car.

I told you this story. Was that you? Yes, it was me. Had they not gone on fire or something like that by the time they got to France? By the time they got to France, they were powder. This is an old school friend of mine's father. By the time they got to France, they had only powder in their wheel. Yeah, if you're going to evade exchange controls and say, this is why you need Bitcoin. OK. Sorry.

Right. I think that's it. I think that's it. That's a lot of questions. More than enough. More than enough for one day. There we have more questions. We will answer them another time. Please do keep sending us in more questions. A, we really enjoy them. And B, we suspect that other listeners enjoy them and find the answers interesting as well. Well, at least find the questions interesting. So do keep sending them in if you have them.

Thank you for listening to this week's Merrin Talks Your Money. If you like our show, rate, review and subscribe wherever you listen to podcasts. Also, be sure to follow me and John on X or Twitter at Merrin SW and John underscore Stepak. This episode was produced by Moses Andam, Samas Saadi and Tala Amadi. Sound design by Blake Maples. Questions and comments on this show and all our shows are always welcome. Our show email is MerrinMoney at Bloomberg.net.

Thrivent can help you plan your finances for the people, causes, and community you love. What makes Thrivent different? Financial services and generosity programs are combined to help you build a financial roadmap for the future while also creating opportunities to give back along the way. Visit Thrivent.com to learn more. Thrivent, where money means more.

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