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Gold Stands to Gain if UK Rates Turn Negative

Monday, October 26, 2020

We have been living in an era of low interest rates for just over a decade, and now policy makers at the Bank of England (BoE) are giving signals that they might be about to turn the concept of saving on its head. The tradition of saving money was always based on the idea that leaving money with your bank would reward you with interest over time.

The BoE, however, is mulling over whether to adopt a policy of negative interest rates. This would have the effect of eroding the value of savings - an unfortunate consequence of the BoE trying to prompt more people to borrow at any cost.

This experimental monetary policy could have a profound effect on investor psychology and boost prospects for gold.

Negative rates boost prospects for gold

Low interest rates penalised savers, as they had little to expect in terms of returns on savings. But now the BoE is actively approaching banks, to see how well-prepared they are for the adoption of negative rates. If savers thought returns were low before, they won’t like to see what happens, if negative rates come into play.

Countries such as Japan and Sweden were early adopters of this unconventional measure, which was intended to combat the risk of deflation by boosting consumption. The European Central Bank is now one of the largest central banks to have been using it, but the UK is holding out for the time being.

If rates stay low for longer and even turn negative, this could have profound implications for how people decide to invest their money. Low yields on bonds could become locked-in, prompting people to avoid risky assets like shares in favour of gold. Gold is a fantastic way to invest, as it doesn’t offer a yield.

Returns from gold come from pure price action alone, and if a sustained upward trend is underway, gains are often to be had as the price begins to go parabolic.

Price pattern supportive of rally

Gold has enjoyed a stellar performance over the last five years. The price of gold has effectively doubled since 2015, taking it above £1,500 per troy ounce this summer for the first time. When gold enters into secular upward movements for such a sustained period of time, it tends to top out after a parabolic rise.

This kind of price pattern means some of the greatest gains in a gold bull market are often closer to the end of the run than the start.

Gold might have doubled since 2015, but a parabolic rise could mean the price is significantly higher. This all assumes that prices can sustain that trend, and the current economic turmoil is generally supportive of this.

Brexit remains unresolved in late 2020

One of the causes of potential future economic turmoil is Brexit. Despite the UK exiting the EU in January, the government’s aim of negotiating a deal looks remote at present. The Conservatives included a pledge in their December 2019 manifesto, saying a deal would be sought. Failure to achieve this would put the UK on the path towards a fully-fledged “no-deal” Brexit scenario.

Under this scenario, the UK would fall onto WTO trade terms, something which would impact supply chains in the UK for importers and exporters alike. The government was believed to be seeking a new arrangement similar to the Canada-EU trade deal. However, the UK made the sudden decision to pull away from talks unless the EU changed its approach.

Trade talks effectively stalled this month before starting again, but time is ticking for the UK to ratify a proper deal. This would need to pass through the parliaments of the EU27 in order to enter into force. Such a high level of scrutiny highlights the pressure that Government faces in the next few weeks, assuming a deal presents itself.

The economy has been volatile enough thanks to the pandemic. The recovery is fragile at present, and could go into reverse as restrictions return in key parts of the economy. An added Brexit shock due to a no-deal scenario could impede economic growth further and boost gold in the process.

Sources of VAT-free silver to change

One of the consequences of Brexit will be the source of VAT-free silver will have to change for many investors. The Gold Bullion Company is aware that investors often tended to seek silver based in Estonia and Germany. Low VAT differentials kept costs low up until now, but Brexit will change the UK’s trading relationship with the EU.

If a deal isn’t negotiated (that aforementioned no-deal scenario), UK-based investors trying to buy silver through Estonia and Germany will find a full 20 per cent VAT bill added to their purchases. This additional charge will be most unwelcome to anyone trying to preserve their wealth in precious metals.

Fortunately, the Gold Bullion Company has a solution - why not come to us and make a purchase of VAT-free silver today? Stored in a vault here in the UK, our VAT-free silver only applies this additional cost if you ultimately decide to have your gold withdrawn from the LBMA vaults and dispatched to you. Storage is safe and secure, and payment can be made by bank transfer without any complications.

If you ultimately choose to sell your VAT-free silver, our storage account system makes this possible

Brexit is key to precious metals

Whether you like it or not, Brexit is going to have an impact on the value of your gold or silver, and how you can make the most out of it. Negotiations are ongoing, so it pays to keep track of where they go, along with looking out for movements in the price of gold and silver.

If you’re looking to invest in gold and silver, give the Gold Bullion Company a call today on 01902 623 259 or contact us by post or email.