Chancellor Jeremy Hunt’s autumn statement generated a raft of headlines that boasted of tax cuts and business support. A 2% drop in national insurance rates is supposed to put more money into people’s pockets, and businesses can continue to expense their investments indefinitely. So, come January when the changes take effect, should we all feel richer?
Considering more people are paying more tax because the income tax threshold was frozen last year, the bunting shouldn’t be hung too early. Meanwhile the outlook for the UK economy has also been downgraded and property prices are expected to slump almost 5% next year. So how do you invest in a sluggish economy? Investing in physical gold is one way to keep your powder dry, with the possibility of a rise in value during these uncertain times, easily liquidated when opportunities arise, and tax-free under certain circumstances.
Behind the headlines
A fall in the inflation rate or a tax cut both make for great headlines, but what do they actually feel like in the pockets of the people who are supposed to benefit? Despite inflation falling to ‘just’ 4.7% in October 2023, the fifth consecutive monthly decline, food prices were still around 30% higher in October 2023 than two years ago.
Similarly with energy prices. On the face of it October was a good month with gas prices down 31% compared to last year. But what that snapshot doesn’t show, is that the price of gas in October 2023 is more than double the price consumers paid two years ago, and they aren’t going to be returning to 2021 levels ever again.
Tax shouldn’t be taxing, but it is…
The main budget headline was a 2% cut in national insurance. The impact would be to put £450 back in the pocket of an employee earning £35,400 a year. But at the same time, more people are paying more tax because the income tax threshold was frozen last year and in the meantime inflation and wages have been rising, dragging more people into the income tax net.
Even with national insurance and other business tax cuts, the tax burden remains at post-war highs. Tax as a percentage of Gross Domestic Product (GDP) is one way to see how much money a government collects in taxes compared to the total money everyone in the country makes. It’s usually high in wartime to fund the war effort, but the tax burden has been rising steadily over the last 3-4 years. It is edging closer to the wartime record and may even surpass the levels seen during World War II in the next few years.
Slow growth projections
While the chancellor was dishing out tax cuts for national insurance and offering businesses permanent tax relief on investments, the Office for Budget Responsibility was taking this largesse and working it into their growth projections. While the economy has recovered faster than expected from the pandemic slump, the forecast for the next five years has been revised downwards. Inflation is expected to take longer to come down to 2%, which means interest rates are going to stay higher for longer than originally anticipated.
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What this means is that consumers will continue to struggle with the cost of goods and services, cutting back where they can, which will in turn affect business’s ability to grow. High interest rates, which have already had a major effect on borrowing and in particular mortgages, will continue to weigh on the property market. Housing transactions are expected to fall by almost 7% next year, and the OBR doesn’t think they will recover to pre-pandemic levels until 2027, while house prices are forecast to fall by 4.7% next year.
Investing in a muted economy
So, if the outlook for the economy is muted, how can you invest the recent ‘tax windfall’ to best protect it from the vagaries of stubborn inflation and sluggish growth? Diversification is a key tool in any investment arsenal, and physical gold offers a counterpoint to stocks that may be buffeted by economic and geopolitical uncertainties. US-dollar denominated gold has been on the rise for several months, buoyed by its safe-haven status amid the Hamas-Israel war as well as the anticipation that US interest rates have peaked.
Gold has a long history of protecting wealth during times of uncertainty. When wars break out that could impact global politics or economics, investors choose to invest in the precious metal to ride out the volatility. The Russia-Ukraine war, despite being confined to one region of the world has had an inordinate impact on global trade and economic stability, compounding rampant food and fuel inflation. Sterling-denominated gold has risen by over 15% in the nearly two years since the war began. The Hamas-Israel war also prompted a spike in gold prices.
Additionally, interest rates play a part in the expectations for the gold price. Because gold doesn’t pay a dividend, when interest rates are rising some investors choose to put their assets into investments that pay interest, rather than gold, that doesn’t. Known as ‘opportunity cost’, it refers to what you give up when you choose one thing (savings or bonds) over another (gold).
However, the expectation, especially in the US, is that interest rates have peaked, and may start to come down again in the near future, which lowers the opportunity cost of buying gold thereby attracting more investment. This means the outlook for some gold experts is positive even after gold hit new intraday highs above $2,100 in early December. Heng Koon How, head of markets strategy, global economics and markets research at UOB, told CNBC that gold prices could reach up to $2,200 an ounce by the end of 2024.
The drivers of gold demand are many and varied, and it is most often viewed as a long-term asset because it has a millennia-long history of maintaining value. With tax advantages depending on individual circumstances, high liquidity and its insulation from the banking system, physical gold is a prudent way to diversify your investment portfolio.