UK: Gold and key interest rates at record highs

Our European neighbours in Great Britain are currently seeing that the gold price performance can be completely independent from current key interest rates. While the Bank of England raised key interest rates to 4.5 per cent a few days ago – the highest level in 15 years – gold has been trading at a historically unprecedented record level of over 1,600 £ per ounce since early April. It is a fact that interest rate hikes cannot hurt the gold price in the long term – but seeing that the Bank of England’s twelfth interest rate hike in a row seems to have hardly affected the gold price is astonishing. How is that possible?

Demand for gold ETFs in the UK is the highest in Europe

In the current second quarter of 2023, UK investors bought 2.9 tonnes of gold-backed ETFs – more than any other European country, according to recent World Gold Council data. Yet gold has never been as expensive in the UK as this year. By comparison, in October 2018, an ounce of gold in the UK traded for £900, according to UK online gold trading company BullionByPost, and even amidst the Coronavirus pandemic, in February 2022, the precious metal stood at only £1,330 – almost 17 per cent below today’s price.

Inflation remains most pressing issue in the UK

Of the many factors that influence the gold price on a daily basis – the US currency, which has the highest gold trading volume globally, the domestic economy, per capita income, central bank demand for gold, etc. – it is the extremely high inflation of over 10 per cent which concerns UK investors most. The current high gold demand is obviously due to the conviction of both institutional and private investors that the precious metal serves as an effective inflation hedge and store of value in their portfolios. And this protection is sorely needed since, according to central bank governor Andrew Bailey, the Bank of England does not expect the inflation rate to fall below the targeted 2 per cent until early 2025.