(Kitco News) – A technical recession in the United Kingdom is helping to drive physical bullion demand as consumers look to protect their wealth, according to the latest comments from the British Royal Mint.
Robust demand for bullion came after the Office for National Statistics said last week that UK fourth-quarter GDP contracted by 0.3%, following a 0.1% decline in the third quarter. A technical recession is defined as two consecutive quarters of contracting economic activity.
“The news of the UK economy falling into recession has clearly caused some investors to reassess their investment strategies and seek out a golden safe-haven for their wealth,” said Stuart O’Reilly, Market Insights Analyst at the Royal Mint, in a note Monday.“We have seen a surge in gold demand as investors mulled the impact of a recession on interest rates and inflation.”
The mint noted that following last week’s recession headlines, it saw a 22% increase in daily sales as of Thursday. At the same time, the mint said that compared to the same trading day in 2023, gold sales spiked by 37% year-on-year, with the number of gold ‘buy’ orders leaping 261%.
O’Reilly speculated that along with gold’s safe-haven appeal, some consumers could be turning to gold to protect their purchasing power. The Bank of England has consistently maintained a hawkish stance on its monetary policy as it focuses on bringing inflation under control. However, many economists believe recession fears could force the central bank to cut interest rates sooner than expected.
If the Bank of England lowers rates while the Federal Reserve continues to maintain its aggressive monetary policy, this could weaken the British pound, further boosting domestic gold demand.
“Any divergence in monetary policy and broader economic outlook between the U.S. and U.K. could have significant impacts on the exchange rate, and gold demand,” said O’Reilly. “Lower interest rates are generally seen as positive for gold, reducing the opportunity costs of holding the yellow-metal over other ‘safe-haven’ assets. As the home of precious metals investing, we are seeing in real-time how gold and precious metals are increasingly becoming a go-to choice for investors looking to diversify their portfolio and hedge against risk. Last week, our Sovereign and Britannia gold bullion coin and bar investment products were the most popular investments among those looking to increase their allocation to precious metals or start their investing journey.”
Growing physical demand in the U.K. comes as gold prices continue to hold support above $2,000 an ounce. Looking ahead, O’Reilly said there is still significant upside potential for gold as investment demand increases and central banks buy at an unprecedented pace.
The UK is not alone in its recession. Last week, Japan became the second developed country to fall into a technical recession. Although the U.S. economy has been fairly resilient, supported by a healthy labor market, many economists and market analysts have said that a recession remains a real threat on the horizon.
Some commodity analysts have said that a recession in the U.S. could ignite a significant rally in gold, driving prices well above December’s all-time highs above $2,150 an ounce.
According to analysts at the investment firm Schroder, gold consistently outperforms equities in a recession.
In a research report published last year, the firm noted that in the six months prior to the start of a recession to six months after the end of the recession, gold saw an average return of 28% and outperformed the S&P 500 by 37%.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.