What Does the Fluctuating Pound Mean for Gold Investment?

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The Pure Gold Company

12/09/2019

In the global marketplace, there are few investment certainties. With sterling near three-year lows and the Brexit debacle limping on with detrimental effect on the markets, investors are having a hard time looking for safe and intelligent options. So what do the recent alarming fluctuations in the value of the pound mean for those considering Gold Investment?

There is always gold

The financial magazine Money Week confidently asserts, ‘Gold is back’ and ‘ there are plenty more buyers still to come to market’. During volatile times this is reassuring and there is good reason to view gold as one of the few suitable investment decisions in the current geopolitical climate.

Gold and Brexit

The pound has already been on a downward slide as each attempt at successful Brexit talks by governments lead by Theresa May and now Boris Johnson to broker a Brexit deal has failed. Because gold is priced in US dollars when the pound falls against the dollar gold costs more in sterling terms. If the UK crashes out of the EU without a deal, the pound is likely to fall, sending the gold price in sterling terms up. In this way, gold can be used as a currency hedge to protect against the falling pound.

Stability is rare

Whatever you are thinking of investing in currency, precious metals such as gold or silver, or the stock market, there will always be highs and lows – that’s the nature of the beast. The gold price surged immediately after the Brexit vote and then lost many of those gains over the next two years. Now as political and economic uncertainty sweeps the globe the precious metal has been climbing once again, up over 30% this year, while sterling has declined amid Brexit worries.

Central banks are investing in gold

In the first half of 2019, central banks bought 374 tonnes of gold, the highest level of demand since central banks became net purchasers in 2010. Driven by Poland, Russia and China, the geopolitical and economic situation is spurring these governments to stock up on safe-haven assets.

Major city players are investing in gold

The city has been largely bullish on gold since the end of 2018 and as the price has continued to rise, their forecasts are rising with it. Head of Metal Research at Bank of America Merrill Lynch, Michael Widmer, believes gold could surge to $2,000 over the next two years as investors seek a safe-haven asset.  Other investment banks will have to consider their forecasts as the gold price has raced ahead of their earlier expectations already.

The individual investor

These are unchartered waters for the UK economy because no-one actually has any idea about the final shape of Brexit and the world, in general, appears to be in such a state of flux. The political stalemate and the threat of a no-deal Brexit are weighing on the market and the wider economy.

Against this backdrop of uncertainty, investors are looking at physical gold as an investment. When the gold price doubles in value like it did between 2008 and 2010, it’s not that an ounce of gold is suddenly 2 ounces of gold, it’s that it takes twice the amount of currency to purchase the same amount of gold.

The most conspicuous example of this is a massive surge in the gold price on June 23rd 2019, when the outcome of the Brexit vote was announced. Sterling plummeted and gold became 26% more expensive. However, in dollar terms, the price of gold increased by only 6% which is probably a clearer reflection of gold demand over that period. A no-deal Brexit is likely to drag the pound down again and the cost of buying an ounce of gold would go up.

Factors like Quantitative Easing, excessive and unwarranted fiscal spending, politics both domestic and international and bank instability all give rise to a depreciating currency. If you live in an environment where you think that your currency is about to drop then it is worth holding some of your wealth in an asset class that holds its value and has an inverse relationship to a declining currency. Buying Gold has always been the most effective way of hedging against currency risk. Considering the uncertainty about the Brexit outcome and the possibility of a global recession, gold looks to be an increasingly attractive investment option.

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"Buying Gold has always been the most effective way of hedging against currency risk. Considering the uncertainty about the Brexit outcome and the possibility of a global recession, gold looks to be an increasingly attractive investment option."

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