With prices for the precious metal close to record highs in world markets, gold has outstripped other investments and investor enthusiasm appears endless. But, warns Professor Bige Kahraman of the Saïd Business School, this does not herald a new golden age for the international economy – quite the opposite.
The Saïd’s Associate Professor of Finance maintains there are many reasons to be concerned about what the increasing price of gold says about the economic situation – especially in the UK. She says, ‘There has been a huge drop in GDP, unemployment is going to go up and the furlough scheme is not sustainable. On top of that, there is a lot of speculation that inflation is likely.’
According to Professor Kahraman, the UK, with its service-based economy, is particularly vulnerable in the current crisis. Not only are many jobs directly related to the leisure industry and other hard-hit sectors, these are industries which will not necessarily recover easily, if at all. Economists have talked about V shaped, L shaped and even K shaped recoveries, but Professor Kahraman says, the UK economy is in for a bumpy ride.
If someone has held off buying a car, because of the pandemic, a dealership may still make that sale before the end of the year. But, if a regular diner has not been out for dinner in four months, they are not going to eat four months’ worth of dinners to make up for it. Professor Kahrman says, ‘I am worried about the UK economy after the second quarter figures last week. It is over-reliant on services, while other sectors [such as manufacturing] have effectively been outsourced.’
She adds, ‘The US economy also has a strong services sector, but it also has Tech.’
With the economy reeling from the impact of the lockdown and the fiscal emergency, with the multi-million-pound cost of the furlough scheme still be reckoned, Professor Kahraman is worried about where the recovery is going to come from, since ‘people are not spending’.
Against such a background, it is easy to see why gold is proving so alluring. Far from being a good thing, a rise in precious metals’ prices is an indicator that investors are looking for a ‘safe’ bet - because nothing else offers returns. The equities market has recovered to about 80% of its pre-COVID level but interest rates are low and there is a lot of uncertainty in the economy, globally and in the UK. There are fears the furlough schemes around the world could prove inflationary and, says Professor Kahraman, ‘Consumers are cash hoarding...It could cause deflation [which is as bad as inflation].’
And the UK economy not only has to cope with paying for COVID, Brexit is coming back, says Professor Kahraman.
‘COVID made Brexit look small,’ she says. ‘But it’s still a problem and it is coming back. I’m worried.’
The professor adds, ‘Fiscal policies come with a cost. There is a lot of macro-economic uncertainty in the UK. In the short run, it may hurt a bit more in the UK.’
In the future, Professor Kahraman says, it may be wise to think of ways for the economy to ‘diversify’. But at the moment, the focus is going to be on which countries emerge as the ‘best of the worst’ in terms of the economic situation. Just about every economy has tipped into recession, because of COVID, but wonders Professor Kahraman, who ‘is going to lose the least?’