What Gold Says About the British Pound
By Adrian Ash
October 31, 2007
If you think the US Dollar's losing out to gold,
just take a look at the British Pound...
WHAT WOULD 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 Gold Bullion
Investments beat stocks and bonds for more than six years?
Well, the Gold
Price just made a new record high 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.
If you've spent any time in London lately, you might think the idea
laughable. At current exchange rates, a pack of cigarettes cost me nearly $12
this weekend.
Oh sure, no doubt 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 here in the British capital, meantime, remains
fixated on the Dollar
Price of Gold...almost as though it's ashamed (or ignorant) of the Pound's
loss of gold value.
But hey, Dear Old Blighty is free and clear of the problems now
causing the US Dollar to sink against gold, right?
Well, not according to gold it 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 £6 per day for every man, woman and child. That's excluding the
government's outstanding debt, valued at £574.4 billion by the end of the
2006/2007 tax year.
If you want that number in US dollars, personal debt is the United
Kingdom home to the "strong Pound" is now rising by $1 million
every two minutes. Total household debt now stands above 160% of personal
income, and it's just overtaken an entire year of economic output.
Worth some $1.18 trillion on top, outstanding government debt is
equal to 42.6% of GDP, the highest proportion in nearly a decade. It's also 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 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 as 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 remained above double-digits between 1973 and 1982.
Still, couldn't happen today. No?
"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.
That guess-timate came before the real wipe-out begins after the
third-quarter write-downs and losses reported by the entire investment banking
industry in October '07. And all this while, gold...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.