For many, 2020 was a year they would rather forget, for understandable reasons. Over 75,000 Britons lost their lives to COVID-19 last year, and the UK is continuing to experience a high rate of infections, as it enters into 2021. The struggle isn’t made any easier following the discovery of a new mutant strain.
This means significantly higher rates of transmission, a new surge in cases and the return of restrictive “Stay at Home” measures, to flatten the curve, reduce pressure on the NHS and save lives. A flurry of vaccines are finally coming off production lines and into arms, but the damage from lockdown has already been baked into the markets, setting the stage for an impressive potential rally in gold prices.
A case-by-case basis
Since the UK Government began collecting daily case number data on COVID-19 infections in early 2020, it is estimated that at least 2.8 million Britons have been infected, but the true number could be significantly higher than this. The first surge, which claimed over 40,000 lives between March and September 2020, was prevented from spiralling any further, as a result of unprecedented restriction to movement.
Shops were shut, venues which accommodated large numbers of people were closed for business and the UK economy entered its worst recession since the Great Frost of 1709. Gold, which often outperforms other assets during downturns, soared to an all-time high of £1,500 per troy ounce by August 2020, having doubled in just five years.
Events including the defeat of President Trump during the 2020 US Presidential election last November, followed by news of vaccines with impressive effectiveness rates buoyed the markets, pushing gold prices lower into year’s end. However, while the UK is already vaccinating vulnerable people in the coming weeks, the new strain of COVID-19 means authorities face a race against time, to stop cases surging any further.
Gold has digested news about the vaccines, but a rally since December 2020 suggests that buyers are looking beyond the apparent good news, and showing concern about the lasting damage done by a new lockdown and the economic fallout it will entail. The UK is expected to slip back into recession by the first quarter of 2021. Until cases and deaths begin to drift lower, gold continues to experience significant tailwinds over the course of 2021.
Unprecedented levels of stimulus
COVID-19 isn’t the only factor weighing heavily on the minds of many in 2021. Gold has been boosted significantly by the monetary and fiscal policies announced by central banks and governments in recent months. The UK is borrowing billions of pounds during the current financial year, to support a weak economy, while the Bank of England has elected to create billions of new pounds with a fresh round of quantitative easing.
All of these stimulus measures create billions of new pounds, which will eventually feed through into the real economy. A sudden influx of new money is likely to devalue the unit value of each pound chasing after goods and services within the UK economy, raising the prospect of higher inflation down the road. As anyone who knows about the dynamics of the gold market will know that gold is traditionally viewed as a hedge against inflation.
The double-digit price increases seen during the stagflation era of the 1970s, plus the bull market during the 2000s commodity boom all speak to a strong relationship between higher prices and a revaluation of gold to the upside. Add into the mix any sterling-related crises, such as devaluations, and you get the recipe for a strong rally in gold.
Just as the government and the Bank of England are trying to stem a health crisis alongside an economic one, the very measures they used to resolve it could risk creating a new economic hazard, when the economy returns to what would be considered a normal level of growth.
Living on borrowed time
In the meantime, gold is gathering strength, setting us up for a potential continuation of the new bull market we’ve seen in recent years. Yields on government bonds remain at near zero, squeezing any chance of generating a return in that asset class, while stocks and shares are rallying off the lows seen last spring. Gold, as previously mentioned, has slightly come off its summertime peak, but the current dip could be a buying opportunity, letting buyers take a breather before a rise to new all-time highs.
All it takes to accelerate the demand for gold is a negative shock to the economy, and buyers would quit the stock market for safe havens, including gold. Borrowed money from the government and money printing from our central bank can only smooth over the cracks for so long – gold, on the other hand, continues to be accumulated by an increasing number of buyers, keen to protect their wealth.
This influx of interest in gold products highlights the importance of finding a seller you can trust. That’s why UK Bullion is doing all it can to provide attractive bullion products to the best of our ability, despite the ongoing lockdown restrictions.
Demand for gold is high, so please note that purchases made through UK Bullion may take at least 3-5 working days to be dispatched. Check out our range of gold coins, bullion bars, silver products and options for guaranteed safe storage, to see how dedicated we are to meeting the needs of prospective buyers.
2021 looks set to be every bit as unpredictable as 2020, so it pays to explore what gold and silver could offer, through UK Bullion today. If you have any queries or wish to make a purchase, don’t hesitate to get in touch. Call us on 0800 090 3256 and you’ll be put straight in touch with a member of our friendly team, ready to assist your needs.