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The Historic Ratios Returned to Profit in 2021

Peter Hemple uses the asset price historic ratios as an indicator of what to expect this year

As we take our annual look at what has happened to the five major asset prices (the FTSE 100, gold, Brent crude oil, UK property and London property) over the past 12 months, and what the historic ratios indicate might happen this year, it is worth noting that 2021 was another successful year for the ratios as a guide to making profitable investments.

It appears that the emergence of the pandemic in 2020, was just a blip with regards to the historic ratios making correct annual predictions, and even though the pandemic is not over yet, the ratios were correct overall last year when looking at the direction of prices. To recap, the predictions a year ago were:

- FTSE 100 to increase by 25.4% (it increased by 13.9%) – CORRECT
- Gold to fall by 36.2% (it fell by 3.7%) – CORRECT
- Oil to increase by 76.1% (it increased by 50.5%) – CORRECT
- UK property to fall by 2% (it increased by 10.1%) – INCORRECT
- London property to fall by 13.6% (it increased by 4.2%) – INCORRECT

Overall, with equally-weighted long/short positions, the historic ratios would have returned a profit of 10.8% last year. However, the key to making money from the historic ratios is to focus on the commodity that is most ‘out of sync’ with the rest, and at the start of last year that was clearly the oil price (Brent crude), which was priced at $51.73 per barrel.

Jumping on that opportunity and taking a long position on oil alone last year would have meant earning a return of 50.5% (or much more if the position was leveraged), which is a decent return by anyone’s standards.

So where are these important price ratios at today? Which asset prices now look cheap and which look expensive? For a quick reference, you can look at the table below, but now let’s look at each asset price in more detail.

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