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The New Year has heralded new warnings to Chancellor George Osborne. He already had to admit recently in his Autumn Speech that his austerity measures hadn’t quite hit the mark. This meant they would remain in place for a further two years than planned for the UK to successfully control its debts. The spending cuts and sluggish economy would now remain (at best) until 2018 rather than 2016.
The problem with such plans is that their time-frame is predicated based on everything going to plan. If tax revenues fall, unemployment rises and benefit claims increase, then the plans start to veer off course and our repayment takes longer.
So the last thing Osborne wanted to hear as a New Year warning from leading economists was that the UK was now set to lose its much coveted AAA rating. This warning itself is partly caused by the Treasury admitting that controlling the national debt will now take longer. The problem is that such a downgrade would have severe implications to Osborne’s plans and indeed to the investment market.
Standard & Poor’s, Moody’s and Fitch – the world’s three largest agencies – have all put the AAA rating on ‘negative outlook’ with a downgrade expected soon.
The major consequence would be to drive up the UK’s borrowing costs meaning it would take far longer to repay debts. This would be passed onto businesses and households, further slowing any chances of recovery. The less transparent effect could be a loss of confidence and sentiment towards the UK – leading to less investment and slower growth.
While this is undoubtedly negative news for those in the UK and a majority of investors hoping markets would pick up soon, it could provide a huge opportunity for gold investors. Firstly, as the world’s safe haven asset, such a UK downgrade in itself would see the underlying gold price rise, as the UK is a major global trading partner. The natural reaction by the investment world would be to seek a safe haven away from traditional currencies and gold provides this. It would also likely see central and commercial banks shift more money out of Sterling and into gold to protect themselves from depreciation.
When the US was downgraded in August 2011 we saw the gold price spike up to record levels. The additional bonus for UK investors would be that a UK downgrade would likely see Sterling fall against the Dollar – meaning further gains in the value of their gold if they bought it in the UK currency. That’s because the value of gold in the UK rises as Sterling falls against the Greenback.
All in all, it makes sense for those in the UK looking to start the New Year with stability and certainty to buy gold if they don’t already own any.
Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.