Editorial: Gold gains appeal in UK as interest rates hit 322-year low

One of the features of the gold bull run from 2001 to 2011 was the divergence in enthusiasm for gold on either side of the Atlantic. Gold bugs taking in the gold price in U.S. dollars were in full frenzy in North and South America, while our mining cousins in the U.K. and continental Europe, looking at the often flat gold price in pounds and euros, were more cool to gold’s appeal, and focused instead on building base metal giants like Glencore and BHP Billiton.

Well, this scenario has certainly changed for U.K. investors and miners in 2016’s gold run, with gold-price gains in pounds exceeding gains in U.S. dollars, and only accelerating after the surprise Brexit vote on June 23.

For instance, in the last 60 days, the gold price in U.S. dollars is up 4.9% to US$1,335 per oz., while in British pounds it is up 14.6% to £1,022 per oz. gold. Going back a year, the gold price in U.S. dollars is up 20.9%, while in U.K. pounds it is up a full 44.5%, with the first divergence in November 2015 and the second, massive divergence happening, of course, at the end of June 2016 with Brexit vote result.

The Brexit vote gave the U.K. pound the distinction of being 2016’s worst performing major currency among 31 global peers by early July, with more than a 12% decline — surpassing even the Argentine and Mexican pesos on the downside. (The Japanese yen, Brazilian real and Russian ruble were the best performers.) In early July, the U.K. pound hit a 31-year low of US$1.2798 on new concerns over U.K. real estate values, and consumer confidence level plunged the most in 21 years. (Ten years ago, the pound was worth US$2.)

By early August, the U.K.’s largest bank HSBC was warning the pound could trade as low as US$1.10 by the end of 2017, and the euro could strengthen to parity with the pound by then. HSBC’s analysts say the exchange rate would need to weaken to prevent the U.K.’s current-account deficit — already one of the largest in the developed world — from blowing out.

Indeed, many financial experts now say a weaker currency is desperately needed for the U.K. economy to get through the post-Brexit economic turmoil, even if there won’t be a true current-account crisis.

In early August the Bank of England’s Monetary Policy Committee responded to fears of a homemade, Brexit-induced recession in the U.K. with more stimulus measures, including cutting interest rates from 0.5% to 0.25%. It’s the first rate cut since March 2009, and the lowest rate in the bank’s 322-year history. As recently as early 2008, rates were above 5%.

With no clear post-Brexit plans yet emerging, more interest rate cuts may be on the way, though bank governor Mark Carney said he “isn’t a fan” of negative interest rates. It’s a 180-degree change from a year ago, when people were expecting rates to gradually rise.

Rolling these macroeconomic factors together, it’s all a positive sign for U.K. gold investors, who may finally catch up with and even surpass the zeal of their gold bug cousins in the Americas.

As a sign of the newly buoyant precious metals market in the U.K., the Royal Mint recently tabled superb annual financial results for 2015–2016, which it described as “the highest revenue in the 1,100-year history of the organization in financial terms.”

The Royal Mint’s annual revenue soared 39% to £360.6 million, with revenue growth of at least 17% delivered by all three of its businesses: circulating coin, commemorative coin and bullion. Operating profit was up 19% to £13.1 million — the highest since the company was vested in January 2010.

In its bullion business, revenue shot up 64% to £185.6 million, with the mint stating that among its precious metal trading activities, “it is the company’s increased share of the U.S. silver market that is at the core of this growth.”