This summer, the UK will find itself with a new Prime Minister entering Number Ten, after the collapse of two previous governments, all within the space of just three years. Whoever wins the Tory leadership contest in 2019, it is highly likely that government borrowing will rise, as both Boris Johnson and Jeremy Hunt have signalled willingness to pledge billions of Pounds to new spending and tax cuts.
On top of this potential spending splurge, both candidates have shown a likelihood of pursuing withdrawal from the EU, regardless of whether a deal has been presented or not, by 31st October 2019. As a consequence, the British economy is seemingly on the verge of entering into a period where the government is preparing to ratchet up spending, while the Bank of England is hinting at offering fresh monetary stimulus.
All of this money printing and fiscal stimulus is almost identical to the approach taken by the previous Labour Government and the country’s then-central bankers in response to the financial crash in 2008. The last time the economy went into a downturn, owing to the global recession, gold staged a rally to levels never seen before, as part of a longer-term bull run.
Could this be a hint that the coming months could be the ideal time to buy gold bullion, in anticipation of a new potential rally?
Pledges on the campaign trail
As both Boris Johnson and Jeremy Hunt have pledged to cut taxes and raise spending in a variety of government departments, we can be sure that the UK is heading for something of a public spending splurge in the coming years, at odds with years of austerity.
In 2017, voters were told by Theresa May that there was no such thing as a “magic money tree”. In 2019, the two final candidates vying for the keys to Number Ten are speaking as if they have stumbled across a magic money forest. Raising public spending could be viewed as a favourable policy move in relation to gold.
The financial crash of 2008 is a good example of this in action. Demand to buy gold soared during that crisis, causing gold prices leapt from just £330 during the early days of the global banking crisis, all the way to £1,150 per troy ounce by August 2011, at the height of the England riots that summer. In just four years, those who had invested in gold would have made a significant return, beating the performance of stocks and the bond market.
In response to the global financial crash, the government raised borrowing, despite having run up a deficit in the preceding boom times. In contrast, by 2019, the UK has faced almost a decade of austerity, and borrowing has been reduced year-on-year on a fairly consistent path. Even so, a potential downturn could easily cause borrowing to rise again, especially if it’s a global one.
Boris Johnson pledges to raise the higher-rate income tax threshold from £50,000 to £80,000. The Institute for Fiscal Studies revealed this alone would cost £9 billion, and benefit the richest 10 per cent of households in the country. Boris Johnson decided to break with a decade of public sector wage restraints, pledging to scrap the pay freeze, something which would result in £25 billion worth of extra spending.
In contrast, Jeremy Hunt plans to raise defence spending and slash corporation tax. The latter would cost as much as £13 billion a year, while Hunt’s plans for defence spending could cost as much as £15 billion more per year by 2023-24. Hunt went further, pledging to help support agriculture, fisheries and small business, a pledge that could cost as much as £6 billion in itself.
Outgoing Chancellor of the Exchequer Philip Hammond referred to the state of the public finances recently, suggesting that he had built up fiscal headroom equivalent to between £26 billion and £27 billion, kept aside to help protect the economy from the prospect of a no-deal EU withdrawal. He warned that a disruptive no-deal Brexit would completely burn through this fiscal headroom and potentially cost the incoming government as much as £90 billion in total.
To put that into perspective, the financial crash saw the budget deficit soar to over £150 billion by mid-2010, a move which coincided with gold touching all-time highs for well over another year after that. By the time that rally had ended in 2011, gold was about 250 per cent higher, just over the space of a four-year period. In short, gold has the potential to make significant gains in the event of a budget-busting Brexit later this year.
The Bank breaks cover
Thrown into this mix is the potential for the Bank of England (BoE) to slash interest rates and turn on the money printing taps again, through quantitative easing. We need only look at how the BoE’s own Monetary Policy Committee behaved in mid-2016, when the UK voted to leave the EU by over a million votes. Interest rates were slashed to an all-time low of 0.25 per cent and held there for over a year, while the BoE also resorted to what is now known as its third round of quantitative easing.
Quantitative easing is referred to in some circles as money printing and involves central banks creating fresh money electronically, which it uses to buy up government bonds. The theory is that more money sloshing around in the money supply is supposed to encourage people to chase after other assets like stocks and houses. In actual fact, one of the main beneficiaries of this policy has traditionally been assets such as gold bullion. This link between central bank money printing and gold price rallies is simple – investors in gold see the potential for a massive increase in the money supply.
The greater the supply of money entering into the economy, the greater the risk of some kind of inflationary shock further down the road. What’s a practical example of this in action? In the months preceding the Brexit referendum, gold was priced at £700 per troy ounce. By the summer of 2016, after the vote, gold prices stood as high as £1,050 per troy ounce. That’s a 50 per cent gain in just a year.
Buying gold online
The prospect of greater government borrowing, combined with money printing from the UK’s own central bank may make the following few months a period of great potential to buy gold as an investment. It is an especially interesting time to consider buying gold online, from a trusted gold specialist such as UK Bullion.
It’s 2019, so make sure your money and your gold are certifiably safe and secure when buying bullion online. UK Bullion is an expert in this field, working for many years with thousands of satisfied customers, as they seek to take advantage of rising gold prices.