The UK election has the potential to set in motion significant change. “On its knees” or “flat on its face,” we all agree that the country is in poor shape when assessing public services and drastically needs investment. But debt is already high, as the country has been marred by the huge increase in government expenditure since COVID-19. Supply chain disruptions, also caused by COVID-19 and the war in Ukraine, have fuelled inflation, which has led to high interest rates. 

Recent sterling stability has been driven by improved UK economic data and expected future stability under a Labour government, relative to economic policy uncertainty since 2016 under the Tories. However, this assumes predictable policies supported by financial markets and fiscal responsibility.

Yet, the next government will undoubtedly need to spend money to get the country back in shape. So, where will that money come from? Higher taxes, more fiscal debt, or will the government be able to boost revenue from existing taxes by increasing economic growth? The Institute for Fiscal Studies (IFS) has stated that Labour will need to hike taxes or increase borrowing to avoid spending cuts.

However, national debt is already the highest, relative to GDP, since 1961. According to the Office for National Statistics, Public Sector Net Debt, excluding state-controlled banks, reached £2.742 trillion ($3.47 trillion) or 99.8% of annual GDP in May, compared with 96.1% in May 2023.

A new government with a decisive majority may bring stability and a stronger pound in the short term, but the window for those looking to buy gold (remember, a firmer pound will reduce the sterling price of gold) – may not stay open for long.

Given the challenges the next government faces, there is a high risk that government policy will weaken the pound, which would be bullish for sterling-based gold prices.

The risks facing the pound are as follows:

  1.  With inflation now back at 2%, the Bank of England is expected to start cutting interest rates. This will reduce the amount of money the government has to spend servicing debt, freeing up funds for other measures, but lower interest rates will weaken the pound.
  2. If the government cannot raise enough money through taxes, it will likely use fiscal measures, which will mean borrowing more and increasing the government’s debt further. With debt all but at 100% of GDP, adding more debt could raise concerns in financial markets, which in turn would likely weaken sterling.
  3. The next government is expected to raise taxes. While income tax, national insurance, and VAT may be safe from increasing, capital gains tax (CGT), inheritance tax (IHT), and pension taxes may well be increased.

Fearing this, investors may look to review their portfolios to ensure they can lower their tax exposure. This could see investors choosing to hold more Royal Mint issued, investment-grade gold coins, which are classified as non-chargeable assets by HMRC. This particularly makes sense for those investors who currently have exposure to gold through exchange traded funds (ETF) and bullion bars. With both liable for CGT, British coins can offer a better option. In the UK, bullion coins produced by the Royal Mint are legal tender, i.e. they have a face value that can, in theory, be used as money, such as Sovereigns, Gold Britannias and Silver Britannias, making them exempt from CGT.

While the price of gold can fluctuate, it’s worth noting gold has held its value well over the years, something that cannot be said about the pound.

Before the Second World War, the pound sterling was the world’s reserve currency, with one pound being equivalent to around five US dollars. Massive increases in UK debt during WWII weakened the pound; it had fallen to $3.25 to the pound by the end of the war. It was then officially devalued in 1949 to $2.80 to the pound, while today it trades at around $1.25 to the pound. In the last 100 years, it has lost 75% of its value and 7% in the past few years. The pound’s value against the dollar is trending downward, and given that the next government’s policies are more than likely going to increase debt levels, that trend is set to continue.

While gold has been volatile since the US removed ownership restrictions in 1973, the trend has been decidedly upward. It has risen as governments have debased their currencies by taking on more debt and printing more money.

The opinion polls in the UK point to a significant Labour government victory in the 4th July election, which will likely give the new government the mandate to introduce some tough policies. While there may be an initial relief rally in sterling, it’s difficult to see the Bank of England and government policies supporting the pound, at least over the first half of parliament. 

Any weakness in the pound will see sterling gold prices rise. This will be an extra boost for UK holders, as the dollar gold price has also been trending higher due to a host of factors, such as rising central bank buying, strong demand from China and the extreme level of geopolitical risk. 

This means gold may be about to benefit from a double whammy: rising dollar gold prices and a weaker pound.

Giles Maber has worked in the mining and metals industry and is now Sales Director at Sharps Pixley, a UK supplier of gold bullion. 

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