Gold under a Labour Government

Jeremy Corbyn

What could a Jeremy Corbyn Labour Party election win mean for your investments, from stocks to house prices to gold.

The general election on December 12 is the latest in a long line of decisions and deadlines linked to Brexit that have caused massive uncertainty in the UK investment market. The outcome will have a significant effect on the economy, impacting investments from stocks to property to precious metals. As the date looms closer and the main political parties set out their manifestos, investors are increasingly concerned with the Labour Party’s socialist-leaning policies. Concerns grow of the impact a Corbyn-led government could have on businesses, markets and the wider economy, which will, in turn, affect private investments and the price of gold.

Gold Price Under A New Government

Historically stock markets have favoured Conservative governments according to a 1998 paper in the journal Applied Financial Economics which examined the markets over almost half a century. More recent elections bear this out. For businesses, an open market capitalist Conservative government is preferable to one with socialist and union tendencies which are viewed as less friendly to industry. That’s not to say markets haven’t risen under Labour governments, but right now the market is factoring in a Conservative win for Borris Johnson, and a shock Labour party victory would undoubtedly hit stocks.

Labour leader Jeremy Corbyn recently pledged to nationalise parts of private telecoms firm BT in order to make high-speed broadband available to all homes and businesses by 2030. And his shadow chancellor conceded that other private telecoms businesses may be pulled into the government ambit as part of the policy. Labour have previously said they would nationalise water, train, mail and energy companies. This has worried market participants, not least because many pensions and investments are tied into the stocks of these infrastructure businesses.

Economists and investors are also concerned about the cost of Labour’s nationalisation program. They fear Labour’s own expensive estimates could actually be underestimated, and their plan to balance the books by increasing taxes on high earners could spark a flight of capital.

An exodus of personal wealth could be followed by the flight of corporate investment too. Labour’s proposed policy to transfer 10% of company shares to employees is a major concern for businesses and the markets. Although it would obviously benefit retail investors, there are a number of complexities and costs involved in this wealth redistribution that would invariably impact investment into the UK.

Companies concerned by Labour’s radical economic proposals are already considering their options. Some are planning headquarter moves outside of the country, others are planning asset sales to remove exposure to the UK. And there will be overseas companies that may have considered the UK as an investment location in previous years who have chosen other countries to avoid the Brexit inertia and political uncertainty. All this has a detrimental effect on the UK economy, the value of sterling and the prospects for the markets over the next few months.

Gold Prices Under a Labour Government

So, in the event of a Labour Government, what is the gold price likely to do? At the very least, sterling is expected to drop in the event of a surprise Labour win, and this will immediately make it more expensive for UK nationals using British pounds to buy gold, which is denominated in dollars. The day after the Brexit referendum, sterling plummeted and the price of gold in sterling terms rose 26%, whereas it only rose 6% in dollar terms.

A Labour Party victory will also impact the markets, including the stock market and housing market. Businesses likely to be affected by Labour’s nationalisation policy will see their stocks fall. And in general market sentiment will decline, at least initially, until there is certainty around if and when the policies would be implemented. The housing market is already being depressed by Brexit and election uncertainty, and Labour’s housing policies, which include private tenant right to buy schemes, could impel landlords to sell up and cause a lettings shortage.

Gold tends to increase in value when other assets fall, and a decline in stocks and housing would be a substantial trigger for retail investors to look to gold as a safe haven investment.

Labour’s historic management of the country’s gold reserves has not been a stellar example of fiscal policy. The former chancellor of the exchequer Gordon Brown sold over half of the UK’s gold reserves twenty years ago when gold was at a decades-long low. In what is widely seen as a very poor investment decision, between 1999 and 2002 Brown sold 401 tonnes of the UK government’s then 715-tonne store of gold. Since the sale, which averaged around $275 per ounce, the gold price has more than quadrupled and is currently valued at over $1,450 an ounce.

The volatility of the gold price was a reason given for the sale, but in fact over the long term, gold remains a stable investment. For people looking to protect their investments from the vagaries of the political and economic climate, gold is a good option. In the event of a Corbyn victory, sterling is likely to fall and the markets will react negatively to the unexpected change in government. Labour policies will impact business decisions, and this will impact the economy as a whole. That said, a Conservative victory won’t necessarily calm the markets immediately because the conclusion of Brexit and the practicalities of the final deal will not become clear for some time.

Either way, gold in highly uncertain times is a prudent move because if the last three years are anything to go by, an election is no guarantee of certainty.

The Pure Gold Company have seen a 236% increase in demand for gold bars and coins from professional clients very concerned about both the short and longer-term outlook. The majority of which have grown accustomed to expecting the unexpected. Owning physical gold acts as an insurance policy especially during uncertain times. The idea is that you take protection by investing in gold and then wait instead of waiting to purchase gold.

Jeremy Corbyn

"Gold in highly uncertain times is a prudent move because if the last three years are anything to go by, an election is no guarantee of certainty."

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