Gold gets a boost as UK moves to switch money printers on again

The case for investing in gold was boosted again today as the Bank of England announced it was increase its money printing program by a further £50bn as an impetus to growth.

The BoE will now aim to have £325bn of government paper in its asset buying program.

Marcus Grubb, managing director, investment, at the World Gold Council said the measure was necessary given the threat of a shrinking economy, “but it is likely to increase the risk of higher inflation and prompt investors to seek assets, such as gold, which can act as a hedge against rising prices.”

A study conducted by the London Business School and released by Credit Suisse this week showed that gold is one of the only two asset classes – inflation-linked bonds the other – that have had positive sensitivity, of about 0.3, to inflation since 1900.

Fear of sharply rising prices from central banks pumping liquidity into the system last year already helped push gold beyond $1,900 per troy ounce in September.

It has jumped almost $16 today in New York, but US economic data that often surprised positively this year has seen the spot price fall from last year’s highs, to about $1,747 now.

But the WGC’s Grubb said: “As a time-tested store of value which cannot be artificially devalued by policy makers, as well as a proven hedge against inflation, gold has a key role to play in preserving wealth in a world characterised by policy intervention, heightened risk and ongoing uncertainty.”

He added that measures elsewhere in the world – such as America’s Federal Reserve keeping interest rates very low for at least two years, Asia’s central banks easing liquidity, and China considering further relaxation of bank reserve requirements – could also boost liquidity.

Asset managers and allocators gave a mixed response to the program’s expansion.

Peter Hensman, global strategist at Newton Investment Management, said the move was right because of the risks to the UK economy from Continental Europe and slow domestic growth, and the expectation that UK inflation as measured by CPI will fall from its current 4.2% (December).

“With this vast pool of gilts already owned by the Bank, arguably the greater question is what the Monetary Policy Committee can do next if they believe further stimulus is required,” Hensman added.

Britain’s pensions were not so neutral.

Joanne Segars, chief executive of their trade body, the National Association of Pension Funds, said: “People retiring now are finding that annuity rates have been squashed by quantitative easing, and that they will get a smaller pension than they expected. The Bank’s money printing leaves them out of pocket for the rest of their lives.

“For the companies that run final salary pensions, QE is a headache which pushes their pension funds further into the red. This means businesses have to put more money into their pension schemes, instead of spending it on jobs and investment.”

She said, however, the NAPF did appreciate the need for a stronger economy.

“But we think the last hit of QE increased [UK] pension fund deficits by around £45bn, and the latest tranche will only add to that bill.”

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