The Bank of England has warned that the UK’s inflation rate is likely to hit 5% early next year, more than double its 2% target, and investors are also now speculating whether the central bank will raise interest rates in an attempt to curb rising inflation. What impact could this have on the price of gold and silver?
Why Is Inflation Rising?
Although consumer price inflation dipped slightly in September, the Bank of England are expecting it to rise to around 4% by the end of the year, and possibly to around 5% early next year. Inflation has been increasing rapidly during 2021 due to the strong economic recovery from the pandemic crisis.
Increasing demand for oil and gas worldwide has bumped up energy prices, resulting in the collapse of many UK energy providers. Not only is this having a knock-on effect on household energy bills, but also businesses who pass these price hikes on to the consumer.
The pandemic has also resulted in huge shortages of supplies and staff, halting production and pushing up prices.
Some economists do believe that the recent rise in inflation may only be temporary, but the surge in energy prices could easily push it higher and make its climb last longer.
Will Interest Rates Rise?
The Bank of England’s chief economist, Huw Pill, has stated that a live decision will be made on whether to raise interest rates during the bank’s November 4th meeting, in an attempt to control the path of the UK economy and possibly help to curb inflation.
The markets are betting on an interest rate rise as early as October, sparked by comments made last weekend by the governor of the Bank of England Andrew Bailey, who stated that the central bank ‘have to act’ to curb rising inflation rates.
But if interest rates rise, this increase in the cost of borrowing could easily plunge the UK economy into a recession.
What Does This Mean for Precious Metals?
Inflation has an extremely powerful influence over precious metals. When inflation increases, and uncertainty grows – investors flock back to gold and silver.
A period of higher inflation could well have a huge positive impact on prices as investors turn away from stocks and focus their energies back into bullion. As rising inflation lowers the value of fiat currency, gold and silver become a useful tool to hedge against inflationary conditions, pushing their prices higher.
Interest rate rises could also impact precious metals. Gold and interest rates usually have a negative relationship with each other so it will be interesting to see how gold will react, if only in the short term. If the result of rising interest rates and increase in borrowing does indeed impact the UK economy negatively in the long term, this could be of great benefit to gold and silver.
We Won’t Say We Told You So…
…but yes, we’ve been discussing the fact that inflation is on its way up for many months on our blogs.
Were we right?
As for now (and as always), we can speculate - but unfortunately, we have no magic answers on what will definitely happen with precious metals. However, we don’t need a crystal ball to know for sure that for many people around the world, nothing says financial security for the future like the possession of real money: physical gold and silver.
This blog represents one person’s opinion only. Customers should conduct their own research and take advice before making an investment. We do not offer investment advice.