F&C's Scott seeks hedge through precious metals

While fears of a consumer slowdown dominate investor concerns, leading fund manager Ted Scott believes that inflation is the biggest risk to the global economy.

"The spectre of inflation is a real risk to the global economy," said Scott, "with the worst potential outcome being 'stagflation' where economic growth falters at the same time as inflation rises".

He points to a combination of oil prices soaring past $100 a barrel, escalating domestic energy bills, rising Council Tax and food prices as evidence that "the genie of inflation is in danger of escaping from the bottle". This week the latest UK Consumer Price Inflation data was revealed to be 2.1% while the Retail Price Index increased by 4% during 2007. "Food and non-alcoholic beverages have been a particularly strong driver of inflation, spiking to nearly 6% last year," said Scott.

"All of this is going to put a squeeze on discretionary spending."

At the same time Scott explains that China and the other fast-growth Asian economies have stopped exporting deflation to the rest of the globe: "Rising domestic wages, improved living standards and growth in domestic consumerism mean that the tiger economies can no longer be regarded simply as exporters of cheap goods or indeed deflation."

"The dilemma currently faced by central bankers is whether to continue to cut rates to stimulate weakening economies or to focus on tackling inflation," said Scott.

"I believe Fed Chairman Ben Bernanke is haunted by the fear that the US will repeat the mistakes made by Japan in the nineties. By not acting fast enough to reflate the economy Japan slipped into a decade of deflation and economic malaise. I therefore believe Bernanke will be inclined to keep aggressively cutting while inflation creeps upwards."

He added: "If inflation heads into double digits this could result in a painful adjustment."

Scott points out that gold prices have historically been a strong indicator of inflationary trends and that in recent years the gold price has soared to record highs with Goldman Sachs this week raising its 2008 gold price forecast to average $915 / oz from $800 / oz. According to Scott, this suggests that inflation will continue to pose a threat.

Though for sometime he has been cautious on mining stocks, Scott concludes: "I am still avoiding base metals where prices have been falling but have added some positions in precious metal stocks to the F&C UK Growth & Income Fund including Lonmin and a basket of small gold miners. These stocks have been selected as a hedge against inflation."