As the UK enters its first recession in 11 years, gold's safe-haven appeal is attracting attention from investors. As the economy slows and markets become more volatile, they are looking for stable assets to protect their wealth.
UK Gold Demand Increases Amid Economic Uncertainty
The announcement of the UK's entry into recession has prompted investors to seek safe harbours for their wealth. According to the Royal Mint, demand for gold rose by 22% in the wake of the announcement last Thursday.
Given the risk of falling interest rates and rising inflation in the event of a recession, investors are looking to protect their portfolios. Gold on the other hand is seen as a hedge against economic uncertainty, retaining its value even as other assets fall.
Central Banks and Geopolitical Tensions Stimulate Demand
Alongside individual investors, central banks are buying gold at a steady pace. Simmering geopolitical tensions and banking sector instability in the US and China are also boosting gold's appeal as a safe store of value uncorrelated with most markets. The Royal Mint has seen significant interest in its gold coins and bars, which are tax-exempt for UK investors.
Gold's prospects remain solid
Whereas a recession is often synonymous with volatility for the markets, gold tends to thrive during periods of economic slowdown. Following the financial crisis back in 2008 and the recent pandemic of recession, the price of gold surged. Should the recession continue or deepen, demand for gold is likely to strengthen further.
Why Investors Turn to Gold During Recessions
In times of economic uncertainty and impending recession, investors often turn to gold as a safe haven for their wealth. Historically, gold has performed well during periods of economic slowdown and recession.
Declining interest rates reduce the opportunity cost of holding gold relative to interest-bearing assets such as bonds. Lower interest rates are generally seen as positive for gold, as they reduce the opportunity cost of holding the "yellow metal" relative to other "safe haven" assets.
During a recession, central banks often cut interest rates to stimulate growth. Gold then becomes more attractive, as investors can no longer get good returns from bonds and savings accounts.
Portfolio Diversification
Adding gold to an investment portfolio provides diversification, as gold often moves independently of equities and bonds. In the event of recession and falling stock markets, gold can help offset losses in a portfolio. For investors wishing to start investing in gold, Royal Mint coins and bars are a simple way to gain exposure to the precious metal.
Future Gold Prices and Demand in the UK
As the Bank of England is likely to cut interest rates to avoid a recession, the opportunity cost of holding gold will fall for UK investors. In contrast, the US Federal Reserve is announcing a tighter monetary policy and higher rates. Any divergence between UK and US policies could have an impact on currency markets and investor sentiment.