With the gold price reaching a record high in world markets, the precious metal has become the best-performing mainstream asset.
Investor enthusiasm for gold appears endless.
But this does not herald a new golden age for the international economy – quite the opposite. There are many reasons to be concerned about what the increasing price of gold says about the economic situation – especially in the UK.
There has been a huge drop in GDP, unemployment is going to go up and the furlough scheme is not sustainable. On top of that, there is a lot of speculation that inflation is likely.
The UK, with its service-based economy, is particularly vulnerable in the current crisis. Not only are many jobs directly related to the leisure industry and other hard-hit sectors, these are industries which will not necessarily recover easily, if at all. The UK economy is in for a bumpy ride.
If someone has held off buying a car because of the pandemic, a dealership may still make that sale before the end of the year. But if a regular diner has not been out for dinner in four months, they are not going to eat four months’ worth of dinners to make up for it.
The UK economy is over-reliant on services, while other sectors such as manufacturing have effectively been outsourced. The US economy also has a strong services sector. But the US has Tech.
With the economy reeling from the impact of the lockdown and the fiscal emergency, and the multi-million-pound cost of the furlough scheme still to be reckoned with, I am worried about where the recovery is going to come from, since people are not spending. Against such a background, it is easy to see why gold is proving so alluring.
Far from being a good thing, a rise in precious metals’ prices is an indicator that investors are looking for a ‘safe’ bet - because nothing else offers returns. The equities market has recovered to about 80% of its pre-COVID level but interest rates are low and there is a lot of uncertainty in the economy, globally and in the UK. There are fears the furlough schemes around the world could prove inflationary and consumers are cash hoarding, which could cause deflation.
Meanwhile, though COVID made Brexit look small, it remains a problem on the horizon.
In the future, it may be wise to think of ways for the economy to ‘diversify’. But at the moment, the focus is going to be on which countries emerge as the ‘best of the worst’ in terms of the economic situation. In the short run, it may hurt a bit more in the UK.
A version of this article was first published on the University of Oxford's news pages.
