Moody’s announcement late on Friday that it was downgrading the United Kingdom’s credit rating from AAA to Aa1 has had predictable consequences for sterling: the currency sinking to $1.5073, its lowest level since the summer of 2010 (though still considerably above the $1.3733 level reached in March 2009). There was a similar pop in the sterling gold price immediately following the announcement, with the effects spilling over into the main US dollar gold price this morning, with the metal now trading over $1,590/oz. This is the first time the UK’s rating has been cut since 1978.
The pound is now at a 16-month low against the euro (at €1.14), with some predicting parity in this rate by the summer. The Sterling Trade-Weighted Index – which measures the pound against a basket of currencies, weighted by trade volumes – sunk by 1% this morning to its lowest level since September 2011. All of this looks like putting further upward pressure on the UK’s inflation rate, given the country’s still-large current account deficit and the relatively inelastic nature of food and fuel demand.
Is this a game-changer for the gold market? To the extent that it reminds people that – as opposed to the problems in the eurozone – being able to print your own money is no panacea, it should be helpful. Moreover as far as American investors are concerned, there are signs that the UK is the “canary in the coal mine” for the US. As Peter Schiff argues in this interview, the problem can be summed up by the phrase “back to the 1970s”, or the word “stagflation”: declining GDP growth combined with stubbornly high inflation. As Schiff says: “you live by the printing press, you die by the printing press.”