Gold has surged above $1,000, oil is at a record high, the prices for commodities – from aluminium to wheat – are soaring, the dollar has plummeted and that dreaded word “recession” is on everyone’s lips.

It’s almost as though the clock has been turned back to the 1970s – a decade that many investors would rather forget.

Back then, oil-price shocks and stagflation – an ugly mix of high inflation and stagnant growth – tested the nerves of even the most patient investor.

In spite of reassurances from Alistair Darling, the chancellor, in last week’s budget that the British economy is in fine fettle, experts are asking whether we are heading that way again, with worrying implications for investors.

George Blakey, the author of A History of the London Stock Market 1945-2007, said: “The early 1970s share many features with recent events, including a precrisis period of irrational exuberance when share prices soared against a background of rising trade deficits and falling currencies.”

The result, in the 1970s, was toxic. In the decade that began with the break-up of The Beatles and closed with the election of Margaret Thatcher, UK shares made just 0.4 per cent a year, after inflation, according to investment bank Barclays Capital.

Annual returns from property were a mere 3 per cent and bonds and cash both fell by 3 per cent a year, in effect losing investors’ money. The only winners were those who backed commodities – a traditional hedge against inflation: oil made 19 per cent a year in real terms and commodities were up 7 per cent.

Some of the similarities between the state of the world’s economy and the strained conditions of the 1970s are striking.

Between late 1973 and early 1974 oil prices soared fourfold, following conflict in the Middle East, sending the global economy lurching into recession.

Since 2003’s Iraq war, oil prices have jumped from about $20 (£10) to last week’s high of $111 a barrel. The world’s economy has proved better able to cope this time round, but global growth is slowing and conditions are expected to worsen.

A growing number of commentators, including billionaire investor Warren Buffett – the world’s richest man, according to Forbes magazine – think America’s economy is already in recession (defined as two consecutive quarters of declining gross-do-mestic product).

Some are even talking of stagflation as the price of commodities, from gold to food, continue to soar – another echo of the decade when Abba topped the charts.

Over the past seven years the gold price has shot up 290% from $256 to $999. Back in the 1970s the price of gold jumped from $35 to $526 – a 1,397 per cent gain, but a real rate of return of 491 per cent.

In some ways, it is possible to take comparisons with the 1970s too far. There is no prospect of inflation hitting 25 per cent, as it did back then, or interest rates topping out at 17 per cent.

Rates are actually falling round the world – the Bank of England is expected to cut rates at least once more before the end of the summer and in America rates could drop as low as 2%.

If an American recession has begun – the White House and US Treasury still dispute this – it could perversely signal better times ahead. Lehman Brothers, an investment bank, says that as long as there are no unexpected shocks, shares tend to bottom out at an average of eight months after the onset of a US recession. So if the recession is beginning now, the market should begin to recover by November.

In the meantime, though, shares are expected to remain turbulent, and inflation – despite Darling’s claims – will remain a problem.

While the consumer price index is showing inflation of 2.2 per cent, Mervyn King, the governor of the Bank of England, said it was quite possible it could rise to 3 per cent or more in the coming months. Another more established measure of inflation, the retail prices index (RPI), which includes things such as council tax not in the CPI basket, is stuck at 4.1 per cent.

Jonathan Loynes at Capital Economics, a consultancy, said: “We’re not going to get stagflation in the way we did in the 1970s as inflation rates are much lower. However, economic activity is falling and inflationary pressures are still quite strong.”

We asked the experts for the best ways to profit in an era of stubborn inflation but declining growth.

Invest in oil rigs

Oil prices soared to $111 a barrel last week as investors piled money into crude oil as a protection against inflation and share-price turbulence.

The traditional way to invest in the oil price is to buy shares in one of the big producers, Shell or BP.

However, investment experts are recommending oil-rig bonds as one of the least risky ways to benefit from booming crude prices.

These bonds are issued by companies to finance the construction of rigs and oil and gas projects. They pay a fixed income so, as long as the firm issuing them does not run into trouble, the returns are relatively secure.

Most are issued on the Norwegian stock exchange and the easiest way to get exposure is to invest in the CQS Rig Finance Fund, an investment trust listed on London’s Alternative Investment Market and the Channel Islands stock exchange.

The fund is not without risks. A big fall in the oil price or a sharp deterioration in economic conditions will hit its share price. It has fallen 9 per cent since January as the credit crunch has struck.

Fund managers recommend it, though, because it has an attractive dividend yield of more than 6 per cent.

Graham Duce of Credit Suisse Asset Management said: “We see it as more like a lower-risk fixed-interest investment. The manager is heavily invested in the fund, which also gives us confidence as it means he has a vested interest in making sure the performance is good.”

Analysts also back small exploration firms such as Aminex, which has interests in America and East Africa and exclusive rights to drill in North Korea. If you prefer to invest in a fund that focuses on the smaller end of the market, Mark Dampier at Hargreaves Lansdown, an adviser, backs the CF Junior Oils trust.

Index-link for growth

Advisers recommend index-linked gilts, issued by the government. The income they pay rises and falls in line with the RPI, as does their capital value.

Peter Fernandes at Smith & Williamson Investment Management said: “They are particularly attractive to higher-rate taxpayers because capital growth is tax-free.”

Last week the price of government bonds jumped and yields fell as investors rushed to safety. However, there are still attractive deals. You can buy a gilt maturing in 2017 that offers a gross yield to higher-rate taxpayers of 9 per cent, assuming inflation averages 4 per cent.

Index-linked savings certificates from National Savings & Investments (NS&I), which is backed by the government, are also tax-free and guaranteed to keep pace with the RPI for a fixed term.

The return is made up of a set rate of interest plus RPI, fixed for three or five years. Both the three-year and five-year certificates are paying RPI plus 1.35 per cent – this equates to 5.45 per cent and is equivalent to a rate of 9.09 per cent for higher-rate taxpayers and 6.81 per cent in the basic tax band.

Everyone can invest up to £15,000 per issue, meaning you could shelter £30,000 in both the three and five-year plans. On average NS&I launches two issues a year.

Hoard gold

Gold prices last week broke new records, reaching $1,009, but many experts think it could go higher. Ross Norman of the Bulliondesk.com, the top forecaster for the London Bullion Market Association for the past four years, predicts that the gold price could reach $1,170 later this year.

The last time gold had such a strong run was back in the 1970s. The price is still a long way from the high hit then, once inflation is taken into account. The precious metal reached a peak price of $850 in 1980 – which is equivalent to about $2,300 in today’s money.

One way investors can get exposure is to invest in Lyxor Gold Bullion Securities – shares that move roughly in line with the gold price. The set-up costs are 0.1 per cent, the annual charge is 0.4 per cent and one share is equivalent to a 10th of a troy ounce of gold. If the gold price is $1,000, each share is worth about $100.

Otherwise, there are managed funds such as Blackrock Merrill Lynch Gold & General, which is up 58 per cent over the past year and 173 per cent over the past three years.

Gold isn’t the only previous metal worth backing. When the gold price rises, silver tends to soar. On Friday it cost $21 a troy ounce, still a long way off its record high of more than $40 in 1980.

You can invest directly in silver via an exchange-traded commodity. Offered by ETF Securities, ETCs track the silver price.

Food for thought

Agricultural commodities are hot: everything from wheat to soya beans is at or near record highs, with gains of up to 100% over the past year.

Some commentators are worried that speculators have been pouring too much money into commodities – making them vulnerable to price falls. However, few are willing to bet that prices won’t go higher, helping to keep inflation high even as growth slows.

One of the easiest ways to profit is to buy ETCs on the London Stock Exchange. ETCs mirror the performance of an underlying index and can be bought and sold like ordinary shares.

Advisers also recommends Potash Corp of Canada, as demand has soared for fertiliser and Potash is one of its key ingredients. Another company to watch is Yara, a Norwegian manufacturer of fertilisers.

Syngenta, a Swiss firm that produces herbicides and insecticides to protect crops, is tipped by Credit Suisse.

Inflation-proof shares

Rising commodity prices are bad for stock markets as they push up costs for businesses, in turn hitting profits. British Airways issued a profit warning earlier this month after high oil prices pushed up its fuel bill by 20 per cent. Combine rising prices with slowing economic growth and the outlook for equities looks gloomy.

But fund managers say it is possible to find companies whose businesses will shine, even in this challenging environment.

Sebastian Lyon at Troy Asset Management said: “Tobacco stocks such as British American Tobacco or Imperial Tobacco are resilient because they have strong brands and consumers are going to continue buying cigarettes even if they are forced to push prices up. They are also committed to growing their dividends.”

On Friday BAT shares cost £19.16 and yielded 3.5 per cent. Imperial Tobacco was priced at £22.91 and yields 3 per cent.

STORY OF A TUMULTUOUS DECADE

In October 1973, Middle Eastern oil producers, angry at the West’s support of Israel when it was invaded in the Yom Kippur war a month earlier, restricted oil supplies. In three months the oil price rocketed from just over $3 a barrel to nearly $12.

Petrol prices soared. Shortages loomed. The government printed 16m petrol rationing books, although in the end they were not used.

Inflation hit 25 per cent in 1975 and the nation’s finances fell into crisis. Stagflation, a phenomenon in which inflation remains high while growth is stagnant or falling, took hold.

Jim Callaghan, the Labour prime minister in late 1976, had to turn to the International Monetary Fund for £2.3 billion of emergency funding, a record bail-out.

Investors struggled to make money. The UK stock market went up 171 per cent in nominal terms during the decade, according to Barclays Capital. However, if inflation is factored into the equation it was 20 per cent lower.

The gold price soared 1,397 per cent in nominal terms. In real terms it was still up 491 per cent as commodities became one of the few safe havens against inflation.

Barely had the British economy recovered than a second oil shock was precipitated by the overthrow of the Shah of Iran in 1979, which led to a second recession.

Interest rates reached 17 per cent by the end of the decade as the government struggled to bring inflation under control.

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