Europe’s sovereign debt crisis is leading to more and more Europeans buying gold. Baird & Co., the United Kingdom’s largest coin and bullion dealer, announced last week that its full-year profits had more than doubled to £4.3 million in 2010 compared with £2 million in 2009.
According to a statement by Tony Dobra, sales, trading and finance director at Baird & Co., the 2010 profits were the best ever in the company’s history. In the wake of escalating debt problems in the world and moves by central banks to debase their currencies, gold is increasing in value. With Britain’s economic problems deepening, many British investors are banking on the Bank of England resorting to more money printing. In 2009 the BoE approved the purchase of £200 billion’s worth of British government bonds as part of its first quantitative easing programme. With the country’s property market continuing to languish and growth at a standstill – and political pressure for money printing growing – “QE2” appears to be a question of when and not if.
As a result of these measures and the losses suffered in the financial industry over the last few years, the pound has depreciated against other major currencies – which has driven up prices. Inflation in the UK now stands at 4.5% on the Consumer Price Index measure, and 5.2% on the Retail Price Index (which many regard as a more realistic measure, and which until 2003 was the government’s preferred inflation measure). Rising utility and import costs have turned out to be the main price drivers in recent months. Buyers of precious metals do not only protect their portfolios or assets against a rising inflation, but also against the likelihood of credit defaults in financial markets. Gold has no credit risk and is thus purchased by investors for hedging purposes.
Fears of a new recession in the UK are growing, and the coalition government has yet to rein in spending in a meaningful way. It looks like gold will continue to appreciate against sterling for some time to come.