Gold News

Gold in GBP Jumps as UK Deficit Crisis Sees BoE Tries to Suppress Gilt Yields

GOLD PRICES set new 2.5-year Dollar lows on Wednesday before rebounding in terms of all major currencies as the Bank of England stepped in and bought UK government debt in a surprise intervention, calling the slump in Sterling and Gilt prices a "dysfunction" while trying to suppress Gilt yields following new Chancellor Kwasi Kwarteng's near-universally decried deficit-tax-cutting budget of last Friday.
Crude oil ticked higher and natural gas repeated yesterday's 5% rise for European December contracts, but other commodities fell alongside global stock markets as the Dollar pushed the Euro below $0.95 to hit fresh 2-decade highs on its trade-weighted major currency index.
With the Dollar price of gold then bouncing $15 from a new 2.5-year low of $1615 before dropping back to $1625, the Euro price of gold rose back above €1700, some 13.4% higher from this time last year.
Gold for UK investors meanwhile jumped back to £1540 following the UK central bank's sudden news, up 20.0% from this point in September 2021 but £40 below this week's re-touch of gold's all-time GBP high.
The UK gold price in Pounds per ounce has now touched that record £1580 level 3 times, first during the Covid Crisis of summer 2020, then during the Russian invasion of Ukraine crisis in March 2022, and then once again this Monday during the sudden UK government debt crisis.
Chart of UK gold price in Pounds per ounce. Source: BullionVault
Having failed to raise overnight UK rates by the 0.75 points widely expected at last Thursday's regular policy meeting, "Were the significant repricing of...long-dated UK government continue or worsen, there would be a material risk to UK financial stability," said the Bank of England today.
"This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy," it went on, promising to detail the size of its intervention "shortly".
Prices for 30-year UK Gilts had fallen so hard overnight that the yield demanded by new buyers jumped above 5% per annum, up more than 2 whole percentage points to the highest since 2002.
Today's BoE announcement saw that drop 75 basis points before rising back above 4.5% – itself a fresh 11-year high when reached in Monday's Gilt crash.
This marks "a very successful and important intervention...the right thing to do," according to former deputy governor of the Bank, now Professor Sir Charlie Bean.
Chart from Trading Economics of 30-year UK Gilt yields
"This is......bad," says the Financial Times' economics editor, in contrast.
"It is actually incredible," adds a Conservative MP quoted by a Sky News reporter.
"The UK central bank has had to step in to protect the UK from the actions of the UK's own government!"
Having cut tax without cutting spending in Friday's "mini budget" to need an additional £1 by April for every £7.65 already owed to Gilt market investors, Kwarteng himself meantime held talks with leading investment-bank and other financial-firm bosses in what the BBC calls a "crisis" meeting.
With lenders unable to price new home-loans amid the chaos in UK borrowing costs, almost 1-in-4 mortgage products were withdrawn by lenders on Tuesday according to MoneyFacts, slashing the total to just half the number available at the start of December, before the Bank of England finally raised its key overnight rate from 0% to reach 2.25% last week.
UK inflation in August ran just below 10% per year.
"Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture," the International Monetary Fund said overnight,, feeling it necessary to release what pundits called a "scorching" statement on Friday's deficit announcement despite having "engaged with the [UK] authorities" on the matter and warning that household inequality will widen.
"This is the IMF self-declaring as a left-wing body," said one pro-Government UK pundit on Wednesday.
"You really think this is about tax cuts?" said another.
"What the Sterling sell-off may have the belief that this budget has made a Labour victory more likely."
"[But] large unfunded tax cuts will lead to structurally higher deficits amid rising borrowing costs, a weaker growth outlook and acute public spending pressure stemming from the pandemic and a decade of austerity," says ratings agency Moody's, cutting its 2023 GDP growth forecast for the UK from 0.9% to 0.3% and warning it may downgrade the UK's credit status.
"A sustained confidence shock arising from market concerns over the credibility of the government's fiscal strategy...could more permanently weaken the UK's debt affordability."
With Wednesday's rally in UK Gilt prices and the retreat in Gilt yields bucking another wide sell-off in European and other rich-world government bonds today, "Longer-dated sovereign notes in most developed markets are starting to look appealing," Bloomberg says, quoting US investment giant J.P.Morgan and noting that "yields are at levels last seen in 2010."

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are 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. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals