What might be the underlying causes?

Confidence in paper currencies depends on trust. The world needs strong underlying global and national economies, political stability and a belief that central banks and governments will underpin the value of their currencies with responsible monetary policies. However, when governments overspend, they can create huge budget deficits or a financial crisis, which severely damages trust in paper currencies.

The European sovereign debt crisis began in 2008 when Iceland's banking system collapsed. The financial crisis of 2007 to 2008 contributed to this. Labour under Gordon Brown left office with no money in the bank (remember Liam Byrne), and this led to the Great Recession of 2008 through to 2012 and years of austerity.

The European Central Bank had to bail out many insolvent southern European countries (the PIIGS), which meant creating money for political purposes.

The global COVID-19 pandemic, which began in China, devastated many EU countries, putting the weaker ones into debt. The resulting debt crisis severely hit the Eurozone and created turmoil in Brussels, putting the Eurozone and European Central Bank under intense pressure. Putting things into perspective, the Eurozone's monetary base increased from approximately 700 billion euros in 2006 to about 1.8 trillion euros in 2016, according to the ECB.

The same is true of the UK, where the COVID-19 pandemic has cost our economy dear at a time when we are in the process of leaving the Single Market.

There are huge uncertainties about Russia and China. Russia is allegedly spreading fake news and hacking western IT systems while the Chinese have taken back control of Hong Kong and abolished the "one country, two systems" agreement. The Chinese are behaving more aggressively towards the west and the USA in particular, creating tensions. Then there is Huawei and even Chinese involvement with Hinckley Point potentially creating difficulty.  

The above factors, amongst others, linking with low or negative interest rates, plummeting confidence in traditional currencies and government institutions, and increased demand for gold from Eastern central banks, all create uncertainty and loss of confidence, which may well be the factors behind today's rally in gold prices. If these trends continue, the strength of traditional paper currencies will decline, and people's trust in gold relative to their own currencies will increase.

So, why should individuals not acquire gold? Central banks do.

Gold has the benefit of being easily storable; it has an inherent value and is not subject to negative interest rates (as is increasingly the case with bank deposits). It might not be a practical day-to-day currency, but it is still an effective medium of exchange. Nevertheless, governments could abuse their powers to outlaw physical ownership of gold as a way to extend their control over people and money. Gold will become even more attractive if the government makes progress in its crusade to abolish notes and coins, but it would then take just one small step after abolishing cash to ban gold ownership too.

This is not scaremongering. US President Franklin Roosevelt made an executive order in 1933 to outlaw gold ownership by individuals.

How much gold did people stash under their beds in 1933?  

Could it happen again? It just might.

Steve Grimes

Financial & Markets Spokesman