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"...If you think the US Dollar's losing ground against gold, just
take a look at what's happening to Sterling..."
WHAT
WILL IT TAKE for the mass of investors to wake up and buy gold?
Are they still waiting for
a new all-time high perhaps, even after watching the metal beat stocks and
bonds for more than six years?
Well, a new all-time high
in the Gold Price just came for British
investors. You might not think that's possible, what with the Pound Sterling
now breaking new quarter-century highs against the Dollar above $2.06.
You might think it
laughable for me to say the Pound is weak given the absurd cost of living
here in London. At current
exchange rates, a pack of cigarettes cost me nearly $12 this weekend.
Sure, maybe I should
quit...but do I also need to stop taking the Tube (now more than $8 for a
single journey), eating lunch (up to $6 for a factory-made ham and cheese
sandwich) or going to the cinema (at least $20 before you buy popcorn)...?
The financial media,
meantime – even when it deigns to comment on gold, formerly the axiom
of Britain's
dominant position in world trade and finance at the height of its empire
– remains fixated on the Dollar Price of Gold.
Why? Because Dear Old Blighty is free and clear of the problems causing the US
Dollar to sink against gold, right?
But not according to gold
we ain't...
"Debt-ridden
Britons owe £216 billion [$445bn] on credit cards and unsecured loans
but are refusing to rein in their spending," reports the Metro newspaper, given away free on
the Tube today.
"Consumer debt rose by
£1.35 billion [$2.78bn] last month and total debts, including
mortgages, went up by £11.2 billion to £1.38 trillion [$2.84trn].
"It means the country
is slipping £15 million further into the red every hour or £373
million a day."
Put another way, the
British nation is growing its household debts by more than $12 per day for
every man, woman and child. That's excluding the government's outstanding
debt, valued above $1.18 trillion by the end of the 2006/2007 tax year.
In short, personal debt is
the United Kingdom
– home to the "strong Pound" – is now rising by $1
million every two minutes. Total household debt stands above 160% of personal
income, and it's just overtaken an entire year of economic output.
Outstanding government
debt, meantime, is equal to another 42.6% of GDP, the highest proportion in
nearly a decade. It also happens to be 10 years since the British nation last
managed to break-even on its international trade in goods & services.
Our balance of payments
deficit reached more than £48 billion in 2006 (nearly $98bn), more than
10 times the worst gap of the mid-1970s, back when the trade gap threatened
"a violent withdrawal" of foreign investment according to internal
government memos.
Energy Minister Lord Balogh, an economist by trade, privately warned the Prime
Minister of a "possible wholesale domestic liquidation starting with a
notable bankruptcy...The magnitude of this threat is quite
incalculable".
The risk of a run on the
Pound in the mid-70s became so great – provoked in no small part by
government debt hitting 53.8% of annual GDP – that Britain, led by a
Labour government just like today, begged the International Monetary Fund
(IMF) for a bail out to help it cope as unemployment and inflation reached
"exceptional levels".
The Pound began its long
descent from $2.42 barely $1.08 over the following decade, while unemployment
rose to 10% of the working population as inflation surged above double-digits
annually between 1973 and 1982.
Still, couldn't happen
today!
"Expect a sustained
knock-on impact of the recent credit crunch on the wider [UK] economy," warns David Miles, chief UK economist for Morgan Stanley in London. He's not being
alarmist; he's simply summarizing the Bank of England's own view, as stated
in its recent Financial Stability
Report.
In particular, the Bank of
England fears, the rise in the price of credit will push far beyond the spike
in short-term London
money-market rates. "Partly that is because risk premia
and profit margins for lenders had been squeezed to unsustainable
levels," explains David Miles. "Indeed, in the UK mortgage
market, spreads had fallen to levels that made it hard to make money."
Now lenders are looking to
make money by lending wisely – and at a profit – once again. Hence
the collapse in new mortgage lending seen in Sept. Down by one-fifth from the
same month last year, said the Bank of England this week, new mortgage
lending in fact sank by 27% from Sept. '06 according to the British Bankers
Association's latest data.
First-time buyers are
"potentially vulnerable" to the threat of falling house prices
sparked by this collapse in new lending. Added to higher interest rates
– now at 5.75% from 4.50% two years ago – the "sharp increase
in the proportion of new mortgages with high loan to income multiples since
2004 has resulted in interest payments reaching 20% of first-time
buyers’ average incomes," says the Bank of England, "the
highest share since 1991" – the banner year for the last crash in
UK house prices.
Private investors playing
the property market may be even worse off, however. "Net rental yields
remain negative," the Old Lady warns in her ironically titled Stability Report. "Bank staff
estimate that after deducting costs, the rental yield was about 2.3
percentage points lower than the mortgage rate in third-quarter 2007.
"Recent investors are
relying on continued house price appreciation to earn positive returns [but]
buy-to-let investors have often invested in new-build flats in the United Kingdom,
which have experienced much lower rates of price appreciation than houses."
What about the "smart
money" of professional investment funds buying commercial and retail
property in the UK
– the next big thing according to press pundits and seasoned real
estate experts alike? Oops! No again.
"Recent falls in UK commercial
property prices and the more persistent falls in yields, along with the
potential for overcapacity given a large pipeline of construction, make this
sector particularly prone to further shocks and to rises in the cost of
finance," says the Bank of England.
But surely the City of London – the powerhouse of the UK economy, now vying with New York as finance capital of the world
– will forge ahead no matter what? The financial services sector has
been growing at a greater than 10% annual clip, but the widely-respected
Ernst & Young ITEM consultancy just halved that outlook in response to
the credit crunch now forcing job cuts across the Square Mile. Researchers at
CEBR, another London
consultancy, believe 6,500 finance jobs will go as a direct result of this
summer's credit crunch.
And gold, meantime...dumb,
yellow, shiny gold...says the British Pound has never been worth less than it
is today. In this race to the bottom, all prices are relative, of course.
But the Pound Sterling
could soon become the Dollar's poor cousin once again, just as it was during
the global stagflation of the early 1980s.
So while Gold Priced in British Pounds may have lagged
the Dollar-price for the last half-decade, it's just broken a new all-time
– and it looks to be pointing higher again.
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
Current gold price, no delay | FAQ | Detailed outlook for 2007
Please
Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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