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Could Gold Gain from Fresh UK Fiscal Stimulus?

Tuesday, July 23, 2019

Whichever way the Conservative Party leadership race has turned out this summer, Conservative Party members will have chosen a man to become Prime Minister; a man who is likely to advocate for Brexit by any means, along with a platform of higher public spending and tax cuts - a form of Brexit public spending spree if you like. With such turmoil on the political horizon, could it be time to consider buying gold, as a hedge against potential market turbulence?

The Bank of England, whose prime responsibilities include maintaining price stability and steady employment, could potentially be forced to slash interest rates and return to a policy of quantitative easing, known by some as another way of printing money, especially if a no-deal Brexit comes to pass.

These factors, a public spending spree, combined with the loosest monetary policy seen before, could combine to make 2019 a bumper year to buy gold.

Golden promises are made

After years of being reminded that the UK government has lived beyond its means for too long and that there was no “magic money tree”, both Boris Johnson and Jeremy Hunt appear to have found a magic money forest.

Mr Johnson pledged to lower tax burdens on higher earners, raising the higher-rate income tax threshold from £50,000 to £80,000. The Institute for Fiscal Studies believes this move would incur costs of £9 billion alone.

Both contenders for the role of Prime Minister have abandoned the near-decade-long Conservative Government plan of cutting the budget deficit, in favour of a public spending increase not seen since 2008. The last time a UK government oversaw such an expansion in borrowing, the government was responding to a global recession.

The global financial crash of 2008 was the drive gold needed, for a turbo-charged rally. Gold prices started at levels as low as £330 per troy ounce, in the summer of 2007, as the banking crisis started.

By the time the panic of the post-financial crash era had receded, gold prices were substantially higher. By the summer of 2011, the price of gold peaked at over £1,150 per troy ounce. That’s a four-year bull run, with a respectable return for gold bullion investors, during a time of market crashes and currency debasement.

Less fiscal wriggle room

Both Boris Johnson and Jeremy Hunt made their spending and tax pledges, based on the assumption that the Treasury could afford a rise in borrowing, post-Brexit. Outgoing Chancellor of the Exchequer Philip Hammond had actually stated that there was indeed some fiscal headroom, equivalent to £26 billion or so, kept aside to act as a cushion, in the event of a slowdown.

On top of Boris Johnson’s budgetary plans, Jeremy Hunt announced his intention to hike defence spending and cut corporation taxes to boost the economy. The former policy would cost as much as £13 billion annually, while the latter could cost as much as £15 billion more per year by 2024-25. Mr Hunt’s pledge to support agriculture, fisheries and SMEs was also estimated to cost as much as £6 billion.

In the face of these budget-busting pledges, Mr Hammond was keen to stress the fact that his post-Brexit war chest risked being completely burnt away, in the event of a disorderly no-deal Brexit. This is because he estimated that this outcome would cost a future Government £90 billion in a matter of months, far outnumbering the money he has put aside.

Putting this into context, a budget deficit rising by £90 billion at the very least risks taking the UK back to levels of borrowing not seen since the height of the financial crash in 2008, which saw the budget deficit peak at over £150 billion. Weak growth and tumbling asset prices allowed gold to rally by 250 per cent during its four-year bull run during the same period. There’s no reason why gold bullion shouldn’t make great gains if the UK finds itself grappling with a new downturn, following a disorderly Brexit.

Money printing back on the cards?

As well as potentially being on the brink of higher government borrowing, the UK is likely to experience fresh monetary stimulus from the Bank of England (BoE). In reaction to the global recession in 2008, the BoE slashed interest rates close to zero and created fresh cash through quantitative easing, seen by some as a form of money printing.

The BoE has demonstrated a pattern of behaviour by following this method, not only following the 2008 banking crisis but in response to the EU referendum back in June 2016. When economic surveys suggested a slowdown, as they are currently doing in 2019 as well, the BoE slashed rates to a new all-time low and embarked on a fresh round of money printing. In the face of a new economic slowdown, it is highly likely the BoE might follow the same prescription. Gold could be the main beneficiary, as it carries no interest, and its performance is based solely on its overall price performance, as based on supply and demand in the markets.

If you want to buy gold, a low-interest-rate environment could prove to be the drive to help you enjoy a significant return on your investment, especially if other assets experience corrections. This is because people often buy gold as a store of value, in times of economic strife. The last time there was fear of an economic slowdown in the UK back in 2016, gold prices rallied by 50 per cent in just 12 months.

Buy gold online

The potential for another gold price bull run is all the more reason for you to not only consider buying gold outright but also buying gold through an online outlet you can trust. The Gold Bullion Company has been ensuring that gold investors get high-quality gold bullion and other gold products at a respectable price.

If you think buying gold is something to consider, check out our guide, to help you decide if it’s time to invest your money in gold bullion today.