Investors Flock to Gold Amidst Negative Rate Fears

Uncertainty over Brexit, the ongoing pandemic disruption and fears of negative interest rates are prompting a new gold rush in late 2020.

After a summer of record high gold prices, British investors are being given increasingly compelling reasons to buy gold and it’s not hard to see why. The UK may have officially withdrawn from the EU in January, but serious concerns remain about whether the UK can negotiate a meaningful trade deal by year’s end.

Not only is Brexit still rattling the markets, four years after the EU referendum. Ongoing disruption linked to the COVID-19 pandemic is forcing policy makers at the Bank of England (BoE) to seriously consider measures including negative interest rates. Such a move would be unprecedented in British economic history, and could have serious ramifications down the line.

Negative rates impact savers hardest

Since the BoE was established and started setting interest rates in 1694, there was an assumption from generations of savers that they could expect a net return for leaving money in the bank. However, a prolonged period of economic weakness since 2008 has limited the number of measures policy makers could rely on.

Interest rates are often cut in times of economic crisis, but the BoE had already slashed rates to near-zero in 2009. A short-lived rate hiking cycle in 2017-18 was cut short by weaker growth in recent years. The pandemic disruption resulted in rates being cut all over again, down as low as 0.1 per cent.

Speculation is now mounting that the BoE is now considering cutting rates below zero altogether – a policy of negative interest rates. The BBC reported this month that the BoE was asking banks how prepared they would be for such a move, suggesting the idea is gaining traction.

It could have the effect of pushing even the most die-hard of savers into becoming borrowers, as they would see their savings eroded away, unless they spent the money sooner rather than later. Negative rates for an extended period would not only disincentivise saving but also potentially put investors off the idea of seeking bonds, as the yield curve would drift lower. 

Gold could benefit in a negative-rate world 

Low rates would mean low returns on savings and on bonds. The benefit of investing in gold is its lack of yield; gold brings net gains for those who buy into it through sheer price appreciation alone. If low interest and low yields on bonds becomes entrenched, gold could become even more attractive. Recent price action is supportive of higher valuations for gold in the medium term.

In just the last five years alone, gold prices doubled from £700 per troy ounce to over £1,500 per troy ounce this summer. If this trend is sustained, gold prices could reach £3,000 by 2025. Negative rates, which were once deemed to be an extreme policy to combat Japan’s Lost Decade, could come to a bank on your high street soon. Savings could be vulnerable, especially if negative rates are coupled with persistent rising inflation, eroding the value of your money even further. 

By pouring your money into gold, its value can be preserved or even enhanced over time, making gold the ultimate safe haven to include in your portfolio.

Brexit negotiations stall as tensions rise 

While the UK officially left the EU earlier this year, the harsh reality of attempting to negotiate a trade deal has remained top of the government’s agenda. The government was believed to be approaching the EU with the intention of seeking an outcome similar to the Canada trade deal. However, talks have stopped and started without much by way of a decisive outcome just yet. 

The clock is still ticking, and unless the UK and the EU can reach an agreement and ratify the deal through the various parliaments, the UK will fall onto World Trade Organisation terms. Such an outcome is alternatively referred to as a ‘no-deal’ Brexit, and would go against the 2019 Conservative manifesto pledge to negotiate a deal with the EU27 by late 2020.

Economic growth has been volatile in 2020, falling sharply during the early days of lockdown before spiking as restrictions were lifted. Severe disruption to trade from late 2020 onwards could risk derailing a fragile recovery from the pandemic. Gold would be well-placed to gain in value if such an economic shock were to occur, as it appreciates in value during times of crisis – a true hedge against economic uncertainty. 

Concerns over losing VAT-free silver 

Over recent years, investors have been able to invest in VAT-free silver, but Brexit could force them to look further afield for investment opportunities without paying over the odds. Those who bought silver through Estonia, Belgium or Germany were able to benefit from VAT-free purchases in particular, thanks to their low differential VAT rates.

Assuming that the UK fails to seal a proper deal with the EU this year, silver buyers would face having to pay the full 20 per cent VAT fee on top of any silver purchase – even if they bought it via Estonia, Belgium or Germany. This would risk pricing many out of wanting to buy silver, and dent demand down the road. However, UK Bullion has an alternative. 

By buying your silver with UK Bullion, we can offer you VAT-free silver with up to six months’ free storage. Your silver bullion can be safely kept in a state-of-the-art vault in the UK, with no VAT to be paid unless you choose to arrange for a delivery. Our website’s online storage system can help you monitor your silver and track its current price 

Whatever you choose to do, buying our VAT-free silver is a cost-effective way of investing in precious metals, as your silver would be vaulted on an allocated basis. 

If you wish to learn more about investing in gold and silver with UK Bullion, call us on 0800 090 3256 or fill in this online contact form. Our friendly staff will be at hand, ready to help with your requests. 

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