Gold makes a Safe Hedge against Inflation Spike

2020 will certainly be a year for the historians to pore over for many generations to come. When the year opened, the world was reeling from the effects of a prolonged US-China trade war, while the UK was entering into the final stretch of exiting the EU.

The assassination of an Iranian military leader involved in the country’s nuclear efforts shocked many, before a pandemic spread from country to country, crippling health systems and economies in one fell swoop. The post-Lehman recovery ended with one of the worst recessions on record in 2020, and gold has been riding wave after wave, moving ever higher.

Here’s why it’s been a year of positives for gold, and what it could mean for 2021.

Year of discontent

On a wide range of parameters, the economic climate was volatile, and indicators gave readings to the downside. Unemployment has risen since the recession started, the pound has been rocked by uncertainty as the UK’s destiny outside Europe keeps investors jittery, and intermittent restrictions hit different sectors of the economy.

The UK is currently on the downward slope of a second wave of COVID-19 cases, with the likelihood that a second lockdown caused output to dip again in the final three months of the year. Until vaccines are rolled out far and wide, restrictions may have to remain in place, and the economy could face spurts of growth interspersed with dips, giving it something of a stop-and-go profile.

That’s before we consider the impact of Brexit – when the UK voted to leave the EU, the pound tumbled, and gold prices surged. When the likelihood of delays to Brexit became apparent by 2019, gold began to surge in pound sterling terms. Now that the UK has left the EU, but fears remain about our trading relationship, gold is sitting at price levels, worth twice what it was before the referendum.

Gold has long been a canary in the coalmine, with gold prices rising to new all-time highs amid market turbulence. It should come as no surprise that gold should surge, when this is precisely what happened in the 1970s, and following the 2008 crash. Seasons may change, but until the UK can find a way of minimising the damage done to the economy during successive lockdowns and resolve the Brexit impasse, the economy remains mired in a winter of discontent of its own.

Money printing continues apace

In 2021, we will begin to see the effects of attempts to keep the economy moving during the past year. Interest rates have been cut to almost zero, giving policymakers at the Bank of England fewer policy levers to pull, moving forward. Having made the cost of borrowing as cheap as possible, without incurring negative interest rates on savers, the BoE is increasingly turning to using money printing to support growth.

Quantitative easing, which was employed during the 2008-09 recession, has been brought back into use by the BoE on a large scale. The Bank has electronically created billions of new pounds, which it has used to purchase government bonds, keeping interest rates low for longer. The intention is for these purchases to allow low rates to trickle throughout the economy and encourage spending.

The viability of QE is up for debate – Japan was an early adopter of QE during its ‘lost decades’ in 2001, following the bursting of an equity bubble, but remained stuck in a deflationary rut for many years afterwards. It is still using QE to revive inflation and growth, but it remains to be seen whether this has a meaningful effect on the Japanese economy. What we know for certain is that creating billions of new Sterling out of nowhere reduces the unit value of each respective pound.

A weaker pound can only boost the prospects for gold, priced in pound sterling. That’s because the UK gold price is impacted by an exchange rate effect – even if gold prices stood still in US dollar terms, a sudden sterling devaluation would force UK gold prices to move upwards by a corresponding amount. Higher inflation is a side-effect of currency devaluation, and gold works as an effective hedge against higher prices.

Gold protects wealth against inflation

If 2020 was the year of unexpected shocks to the downside, 2021 could be a shock to the upside, especially when it comes to the price of gold, as well as price levels in general. Inflation erodes the value of the pound in our pockets, and with banks offering sub-inflation interest rates, our savings are being eaten away faster than we can spend them.

Gold acts as a perfect antidote to inflationary pressures, as it did in the 1970s – when the UK was hit by stagflation, gold prices rose in a parabolic price pattern, soaring from barely a few pounds per troy ounce in 1970 to as much as £360 per troy ounce by 1980. When inflation took off again in the early 2010s, gold soared above £1,000 for the first time.

The expected rise in inflation will undoubtedly have a positive impact on gold prices in 2021. Instead of watching your money lose value, you can offset that by buying gold from UK Bullion. In the last five years, prices have doubled, and helped not only preserve the wealth of buyers, but boosted it too. Buying gold is not just about protecting wealth, but making an investment for the future.

Events such as the 2008 crash and the COVID-19 panic weren’t supposed to happen, but they happened nonetheless. Policy makers have responded to the current crisis as they often do, trying to inflate the economy back to growth. Gold has seen through the current rhetoric and rising prices over the last year suggest little confidence in policymakers to be able to achieve the right balance.

In trying to avert a deflationary collapse, policymakers may have risked creating a stagflationary shock in the future. Add turbulence from a poorly-resolved Brexit, and gold could rise even higher. For more information about buying gold, get in touch with UK Bullion today. We’re specialists in the field of selling high-end gold products, and are always on-hand to resolve any queries you may have.

Call us on 0800 090 3256, to get started with buying gold with UK Bullion. We wish you a merry Christmas and a happy 2021!


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