September 5, 2025 • 39 mins
In this episode, Anthony and Piers dig into the surge in UK borrowing costs, now at their highest since 1998. Is this a warning sign or just a media-fueled blip? They explore the fiscal strain, political reshuffling, and why the pound took a sharp hit earlier in the week.
The conversation then turns to the deeper structural issues—rising inflation, slowing growth, and a widening current account deficit. Could this all snowball into a credibility crisis for the UK government and Bank of England?
Also in this episode: gold’s breakout past $3,500, Goldman’s bold $5,000 call, and what the rally tells us about fading trust in fiat systems and central bank independence.
(00:00) UK: Borrowing & Inflation
(08:41) Debt Spiral
(17:17) Deficits & Outlook
(25:56) Gold as Hedge
(34:25) Trust in Gov’t & Banks
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Hello and welcome back to the Market Maker Podcast.
And just to give you a bit of a flavour, as we look to break
down some of the major moves in markets this week, we're going
to focus and start with the UK where long term borrowing costs
have surged to their highest level since 1998.
Sterling also slumped earlier inthe week, investors questioning
(00:24):
whether the government can stickto its fiscal rules.
It's a story of rising debt, persistent inflation, political
pressure. Of course, I think they have now
announced, Piers, the autumn budget late in November.
But this isn't just about UK. Global bond yields are climbing
to with the US and Germany facing their own fiscal strains.
(00:46):
And then there's gold. That's the other talking point
for this week, blasting through $3500 an ounce, a signal that
investors are hedging against something deeper.
Is it fading trust in governmentfinances and central bank
independence while stocks and bonds are looking pretty calm?
The question is, is gold flashing us some sort of warning
(01:08):
sign or not? So, as ever to unpick this,
joined by Piers, how are you? Not bad, yeah, looking forward
to, you know, UK focus today, atleast to start with, which is
good. I'm happy about we normally tend
to lean towards US centric stuff, which, you know, they're
(01:30):
the big boys, so fine. But yeah, good, good to have a
domestic focus today And, and those listeners who aren't in
the UK, you know, good for you guys to get a little insight
into what's happening over here.And yeah, it's, it's, it's, it's
not going to be pretty what we're going to cover, to be
honest, because yeah, we're in abit of a tricky situation, I
(01:53):
would say. So looking forward to diving in.
Yeah, it's interesting as well because a lot of this attention
was earlier in the week and we obviously do our rap at the end
of the week. It's amazing how calm now the
market feels compared to the endof days scenarios that were
definitely flying around. I think it was on Tuesday when
(02:13):
it kind of hit its moment. But yeah, yeah, talk me through
them. Maybe some statistics to kick us
off of of the kind of size of the move, the magnitude and why
the press kind of jumped all over this.
Well, the press jumped all over it, which is why it kind of
feels like, you know, obviously a really big story and that's
(02:34):
really because they could, you know, print headlines like, you
know, yields. It's 30.
Let's let's be clear here, 30 year government bond yields, you
know, reaching, I can't even remember what is it 25 year
highs. I think was the stack.
Basically, you got to go back sort of well around the turn of
(02:55):
the century. 19. 98, Thank you. So look, that's a hell of a long
time, right? So when a market does reach a
price point that it hasn't kind of traded out for such a long
time, obviously it's notable andparticularly when it comes to
the press and when we we kind ofbang the press quite a lot on
(03:18):
this podcast, I'm going to do itagain.
But you know, they love a sensationalist story that's
negative, right? That's that, that's the, that's
the click bait winner. If it's bad news and you can
sensationalize it, then perfect for your your press, right?
So they're all over this becauseyields crack climbing like this
is bad news for the US, for the US, for the UK.
(03:40):
This is kind of really setting alot of things, but borrowing
costs for the UK government, forexample, I mean, it's absolutely
kind of driven by these bond yields at the point at which
they're borrowing and issuing new bonds, right?
The the cost of borrowing to theUK is really a function of, you
know, what are the yields out there in the marketplace right
now. So basically in simple terms, it
(04:02):
hasn't been this expensive for the UK to borrow money for the
whole of the century. It's the most expensive since
1998 and when we've already got a lot of debt and when we've
already got a kind of deficit because obviously COVID, you
know, governments, they're extreme sort of intervention
cost huge amounts of money. So obviously debt levels rose
(04:25):
right across the planet. That's not auk, you know, thing
only, of course. So this is the problem, rising
borrowing costs when you've already got a load of debt.
And that's why it's kind of, yeah, a bit alarming.
I mean, what the press didn't say was that the last time the
UK 30 year bond yield hit a 27 year high was on the 19th of
(04:54):
August, so literally 2 weeks before and then and actually the
bond market has been climbing like this and it's been trending
higher for 3 1/2 years. So it's an ongoing extension of
a 3 1/2 year story. It's just that this trend is now
(05:14):
reaching levels, as I said, thatwe haven't seen for for, you
know, 27 years. And I was going to ask you that
why did because on, I think it was Tuesday, the pound dropped a
lot and it looked like the sort of chart that you would think,
wow, there's a new piece of information that's come out.
It didn't look somewhat inevitable that we're going to
(05:36):
hit these levels. Yields have been rising for some
time. I know a lot of people were
talking about the the shake up at Downing St.
Was that, Yeah, was that not perhaps the reason, but the
catalyst with the pound it was. I think it was the catalyst
coupled with, you know, a breakout in that yield like
technical now a technical breakout, you know, meaning that
(05:59):
it yes, made another new high. But, you know, that can often
just attract in more buyers because, you know, buy signals
start flashing as it breaks up through a ceiling.
Well, so you can get a bit of anacceleration, right?
Couple that with so that, you know, it was kind of triggered
by the government shaking up their Treasury Department.
(06:22):
So why do that? Well, clearly the people that
were in those roles weren't doing a good job.
Why is that a problem? Because the government's in
charge of our finances. And if they've got rid of the
team that were in charge becausethey weren't very good, well,
then surely that's a concern, right?
And maybe the government can't be trusted and maybe their
fiscal kind of credibility took a bit of a whack there, which
(06:45):
triggered then spike hiring yields.
And because it, it was quite a rapid move then it kind of kind
of I guess cascades through other markets then.
So the pound got whacked, as yousay, it actually sold off about
200 pips in pretty short order. This is back on the 2nd of
September, so 200 pips in in a day.
(07:06):
That's a lot, right? That's an unusually large move.
I would say it's recovered 3/4 of that sell off.
I'm I'm just looking against thedollar only here, right?
So back on on Tuesday, it was trading at 13530, let's say, so
1.3530 and then it dropped to 133, 50 and it's recovered 3/4
(07:29):
of that. So yeah, quite a short sharp
move triggered by that government announcement.
The media jumped all over it. We had a kind of breakout on the
upside on the 30 year yield thattriggered kind of correlation
moves in other markets. And all of a sudden, you know,
there's a little bit of a momentum story behind this sort
(07:52):
of, let's call it a mini panic. And it was very, very mini
whatever. If there's a word in a minuscule
is maybe even a better term, right?
A minuscule panic. And now things have just calmed
down because look, all of this, all of this stuff that the press
have decided to shine, shine a light on earlier in the week.
It's, it's just business as usual.
This has been happening for 3 1/2 years.
(08:15):
So it's not actually new. So.
I read a piece from Deutsche Bank and you've talked about
this before and it was talking about this slow moving vicious
cycle circle. And perhaps you could explain
it. And this is that idea that these
concerns, these debt concerns push yields up.
(08:37):
But then the dynamic, given the limited fiscal headroom that the
UK government currently has for the reasons you described, one
thing makes the other worse and then it comes back and it's it
kind of snowballs. Yeah, it's like a negative
feedback loop that then it's a vicious cycle.
So this is how it works. Remember, those bond yields
(09:01):
rising means that borrowing costs go up.
Right now, why do borrowing costs, why, why are they going
up? We'll maybe touch on that after.
There's a few reasons here, particularly the UK.
Look, these yields are rising right across the globe.
So you know, everyone's pretty much certainly G7, right?
(09:21):
The, the major economies, their yields are rising as well.
But the UK is a little bit rising faster for particular
reasons. We're going to go into that.
But look, here's the negative feedback loop.
If look, think about the, the lender now, right?
So remember these government bonds, that's the vehicle by
which the UK government borrows money.
So they issue bonds and then they sell bonds to investors,
(09:44):
banks, you know, other governments like international
investors and so on, right? And basically the investors are
buying the bonds, meaning they're lending the money, OK?
Well, now in any loan situation,the lender, it has credit risk,
OK, And that's because the borrower, well, how credit
worthy is the borrower? And what's the chances of me
(10:06):
getting my money back? Am I going to get paid the
interest payments for the lifetime of the loan?
Am I going to get my money back at the end of the loan, right.
These are quite key, obviously key questions for the borrower.
So when it comes to governments,you're thinking right, well,
what shape is the UK economy in?You know, what shape is the
current fiscal situation in? Is the government credible?
Are they doing a good job? You know, all these factors are
(10:29):
kind of wrapped up into that kind of credit risk analysis
right now. If you start to worry that
things aren't going in a particularly good direction for
the UK, then as a lender you're thinking, yeah, well, you know,
the credit risk is rising here. So if I, if I the investor, I'm
going to lend you money, the UK,that risk is going up.
(10:51):
So I require a higher interest rate to compensate me for the
greater risk. OK, So that's the mechanism.
Now, the problem is, of course, if the yields rise, well, that
makes borrowing more expensive, which makes the fiscal situation
worse, right? So then, well, that means the
(11:12):
risk has gone up, so investors need more return.
So I'm going to lend to you, butI'm going to need more, more,
more interest, right? So then interest rates go up
more, but then that makes the fiscal situation worse, which
means lenders need more money, which means the fiscal situation
gets worse and and it kind of itcan ratchet up and spiral.
(11:32):
Now, it's crazy to be talking about this with regards to the
UK, like a major economy, OK, This kind of stuff is normally
reserved for your emerging market.
That's kind of got into some fiscal difficulty.
Like Argentina, right, over the years has required an IMF
bailout multiple times because they haven't been paid.
(11:55):
They've got to a fiscal situation where they can't
afford it anymore because there's a limit, right?
You can only borrow money at an interest rate that you can
afford. And that's the kind of tipping
point. If that interest rate claims, if
these yields climb to a point where, hang on, it's completely
unaffordable, then the whole thing collapses and then
(12:15):
investors stop lending to you entirely.
But you need money because we'vegot a debt to service and a
deficit. And so this is where then you
need a bailout. And that's where they are.
And that's what the International Monetary Fund is
for, is to try and backstop someof this kind of kind of default,
you know, scenarios. So look, the UK is not, they're
(12:36):
not there, right? The the yields we're talking
about, obviously we're not, we're not at that point.
The yield's at 5.553% on the 30 year, OK.
So, you know, we're not at the point of, of the tipping point,
but it's the direction of travel, OK.
And you know, has the risk of UKdefaulting on its debt gone up?
(12:59):
Yes, it has, But it's gone up from a very low tiny minuscule
risk to a slightly less minuscule risk, OK.
And so this is what's happening.Yeah, so there, there's a bit of
a split here to to read or interpret the news because I, I
was it Kenneth Clarke or who, who was it that said the IMF
bailout comment? But it was it was I think it was
(13:21):
a Tory, former Tory member. That's right.
And so, yeah, from an optics point of view, it's just a very
simplistic way of attacking the incumbent kind of government.
But for the reasons you said, which are supported by evidence,
because I did see that there wasa record £140 billion for a £14
(13:43):
billion guilt syndication. Now just explain to me what that
is because a lot of people mightgo, oh, what's a guilt?
What's a guilt syndication? Why is there record orders?
But I mean that very much validates kind of what you're
saying, right? Yeah.
I mean, so remember the government has a deficit that
means that it the budget for this year and you mentioned
(14:05):
something fiscal headroom you mentioned a minute ago and
that's basically when the government sets out it's budget
for spending for the year, it'llhave a bit of headroom IEA
margin for error. So that you know, there's a
little bit of contingency there,right, in terms of how much we
we're going to spend this year versus how much we're going to
borrow. Their headroom is dropping and
dropping and dropping. And that's because the economic
(14:28):
situation and, and the cost of borrowing and so on has changed
as we go through the year. And it's changed in a bad way,
meaning their contingency is kind of dropping to wafer thin.
And again, This is why the pressare on it because now there's
literally no, now there's no margin for error.
Now in the final, what? Well, we've got to get to
November, right? So really we've got two months
(14:51):
to kind of get to that point where they then issue another
budget. So look, the, the, the head,
the, the contingency's almost gone, right?
But, but look, I would say that,you know, let's, let's explore
why this is happening. You know, so it is happening.
So why? And the underlying drivers, I
would say, are kind of, there's kind of four in my mind, I would
(15:15):
say that debt and deficit sustainability is an issue.
That's not just the UK, right? So we've got countries all over
the world whose debt situations have got worse because of COVID,
right? So this one isn't exclusive to
the UK. We've got a lot of debt.
We've got a deficit. And look, we're worried the
(15:37):
government might not be able to kind of steer this ship, you
know, hence that story earlier in the week with Starmer
changing up. It's kind of Treasury team,
right? So that's one.
Number two, inflation. So inflation is rising, OK, and
it's rising more in the UK than other countries.
So this is a kind of you one of the issues why the UK bond
(15:59):
yields are rising faster than others.
So right now we've got an inflation rate in the UK at
3.8%. Kind of comparing that to the
other G7, it's 2.7 in the states, Germany's 2.2, Japan's
3.1 for example, Italy and France, well, France is nought
.9 right? So our inflation is higher than
others. Now what happens there is if
(16:20):
inflation rises, well then againthat that has an impact on what
we call the long end of the yield curve.
So long duration bond yields will rise.
And that's because inflation erodes the value of money,
right? So if you're going to lend money
for a long time and inflation's high, when you get that loan
returned to you, the value of the money's gone down.
(16:40):
So you need compensating for that and that's what you get
this yield for. OK, so, so inflation's a key
problem and and the trend on inflation is not looking great,
right? In the UK, inflation's been
trending higher for 12 months now.
Next. Well, what's the economic
situation and what's our expectations about how the
economy is going to perform going forwards?
(17:02):
Because look, the government hasdebt and a deficit, but if the
economy grows really powerfully well, then that means the
government's receiving increasedrevenue through more tax, right?
If companies are making more profit, that's more corporation
tax. If people are buying more stuff,
that's more sales tax and so on,right?
So is the economic expectations looking positive for the UK?
(17:24):
No, not really. So again, I don't think the
economy is going to come to the rescue here, right?
So kind of remove that and then you're left with something
called the current account deficit.
And again, this is a Auk specific problem relative to the
other G7 nations. Now what is a current account
(17:45):
deficit? That's looking at the difference
between how much, how much goodsyou, what's the value of the
goods you import versus the value of the goods that you
export. OK, Now for the UK, we have a
wide current account deficit. OK, now to put numbers on it,
our deficit is -2.7% of GDP. So the value of that difference
(18:08):
between imports and exports is 2.7% of GDP.
It means we import more stuff than we export.
It's actually only the US that'sgot, you know, out of the lead
big economies. It's only the US that has a
larger current account deficit. That's -3.9%.
OK, Others for example, like let's take Europe.
Germany has a really strong positive current account surplus
(18:30):
at 5.7%. Japan has a big surplus 4.7%.
Why? Because they export a load of
stuff. They import stuff as well.
But think about the automotive industry.
You know, you've got your big giant German automotives, you've
got your big giant Japanese automotives.
One example there as to why those countries have a slightly
(18:50):
different kind of ratio between imports and exports.
So for whatever reason, over thedecades and decades, the UK has
shifted more to a services kind of lead economy, which means we
don't manufacture as much stuff anymore, which means we don't
export as much stuff anymore. But we're importing like crazy.
(19:11):
So we have this this deficit that's wider than others.
Why is that important? Well, it means you're more
reliant on foreign investment. Because think about it, let's
say, I don't know, super simple example.
Let's say we buy £100 worth of imports, right, from foreign
suppliers. That means there's £100 going
out of the country to pay for those imports, right?
(19:33):
Then let's say we're exporting less.
So let's say we export £80 worthof stuff where you get 80 lbs
coming back in, OK, as your international buyer pays for
that stuff, right? But that's a 20 LB gap.
You got to, you know, that moneyjust doesn't vanish.
You've got to kind of balance the books, right?
So where does the 20 lbs need tocome from?
(19:54):
Well, it needs to come in to thecountry from outside and that
often comes through foreign investors buying UK gilts, gilts
being the name for UK governmentbonds.
So that's where we get this kindof inflow of money from
international investors to kind of balance the books if you
like. So we're just more dependent on
(20:17):
foreign investors than other countries because our current
account deficit is wider. Why is that a problem?
Well, if the. Fiscal kind of situation in the
UK deteriorates. It's the foreign investors that
kind of vanish first. They're the ones that head for
the hills, right? Especially, you know, if you're,
(20:40):
yeah, domestic is a little bit different, but it's the foreign
investors that kind of pick up their sticks and head home first
in a fiscal crisis. And so because we're more
dependent on those, it's just a little bit more risk for us,
which means another feeder into why the UK 30 year bond yield is
rising and it's rising faster than you're seeing in other
(21:02):
countries. That last point, would that
explain why Starmer was one of the first to cut a deal with
Trump with these trade tariffs? Well.
Actually the UK is very unusual in that we actually import more
stuff from the US and we export to the US, the US being the
(21:25):
biggest economy, one of the key reasons why we've got a current
account deficit, you know, unlike which is wider than most
others. So I don't think it really
matters from a, a current account point of view
necessarily. I just think we've obviously got
a historically very strong relationship with the US and the
the tariff thing was less risk for us for those reasons
(21:46):
because, because we actually import more than we export to
the US. So I think Starmer just wanted
for optics reasons probably to just get a deal done early
doors, which was the right thingto do in hindsight because our
tariff rate is lower than what you're seeing, you know, in
these negotiations and agreements with the likes of
whatever Japan and the EU and soon, whose tariff rate is 15% and
(22:10):
we agreed at 10. How much emphasis, then, are you
putting on this autumn Budget? Yeah.
So this is like the Autumn Budget, right?
This is where the government announces, right?
What's our spending plan for 2026 and how are we going to
afford it? Where are we going to get the
money from? I think this is, it's the most
(22:33):
important budget since last year, but last year's budget was
the most important budget for decades, in my opinion, right?
Because you have the Labour government coming in and they
did some radical stuff by increasing taxes to try and, you
know, fill the hole between, youknow, the budget spending and,
and the amount of revenue comingin.
I think this time in November, they look the UK government that
(22:57):
they're not doing well, particularly fiscally.
So they're going to have to, they're going to have to raise
tax. And this is obviously a very
unpopular thing to do. It's just which taxes?
But yeah, a lot of people in theUK are very apprehensive going
(23:17):
into that budget because what itwill mean for them from a tax
point of view was a real concern.
And of course, we talked about the economic outlook.
You know, if you get taxed more,well then of course you got less
disposable income. So it's one key reason why we're
just a little bit nervous about the economic trajectory, because
we don't know what the government's going to do.
Looks like they're going to haveto raise tax because the fiscal
(23:39):
situation's in a mess and so yououtlook for growth going
forwards is a bit depressing. I can't speak on behalf of the
broader public but thinking of financial services, which is the
industry we work in. Any of your friends left the UK,
gone to Dubai or anything like? That one friend has.
(24:04):
You've almost hit the nail on the head.
He went to Abu Dhabi, actually. James Wright, keen listener to
the pod. So hi.
Hi, Jim. Yeah, He, he moved.
Not for these fiscal reasons, though.
It's more for a job, job offer. But yeah, I, I don't know, I
don't think it's not like panic stations, you know, it's not
like, Oh my God, pack your bags and leave.
(24:27):
Immediately, the ability to alter taxes, which is going to
probably impact us, everyone. And for that current account
deficit, that's a bad news because we need foreigners
coming in. We need, we need foreign
investors buying, I don't know, property in the UK that helps
(24:47):
with balancing that the books, right.
But if they're if they massivelyraise the tax, stamp duty tax,
which is the tax we have for buying property, right?
If they raise that well, then less, less foreign buyers are
going to buy property, right? And then that's bad news again
for the current account. So yeah, it's, I just, I don't
know how the, the government aregoing to, I don't know how
(25:08):
they're going to sort this out, but they've got a really big
problem. And so whilst it's not like
crisis Armageddon, you know, just around the corner, it's the
direction of travel and it's thelack of ideas for, you know, a
strategy. There's no what's the strategy
here? So we just need to figure out a
strategy and then start deploying it sharpish.
(25:30):
So we've got about a two-month holding pattern basically.
We can't really make any great big assumptions.
You had this panic at the beginning of the week.
Everyone's now aware of this situation, let's say.
And so we just got to wait untilthe end of November till we hear
the budget as to where this goesnext.
(25:51):
Yep. And maybe longer term or let's
say medium term, you know, does something come out of nowhere to
kind of come to the rescue here,such as the AI revolution, you
know, does that lead to a genuine improvement in
productivity, which is somethingthe UK, you know, our
productivity levels have been, you know, really low for years.
(26:15):
And can we get a revival in productivity which can lead to a
more accelerated economic growthstory?
But watching a straws here. Yeah, he'd lacks exactly.
All right, Well, look, let's have a good segue then into gold
because people are often lookingat, you know, trying to curve
fit narratives as to why gold ismoving.
(26:36):
And certainly, you know, as yields have been on this pretty
persistent rise on a global level, gold equally has
continued to move higher and it's gone through $3500 an
ounce. But stocks generally quite,
quite steady overall. Just wanted to understand like
(26:57):
your rationale of what is going on with gold and how is that
connected to some of this conversation we've been having?
Well, so it's connected on 2 fronts to the conversation we've
just had. I would say, firstly, I was
talking about inflation. So inflation is back on the rise
like generally around the world.But as we've said more rapidly
in the UK, there's nothing like the inflation crisis we had back
(27:20):
in 2022, right? To and to and to quantify that
in 2022, the UK inflation peakedat 11 percent.
We're now, it's on the rise now,but it's at 3.8, right?
So it's obviously nothing like that inflation crisis.
But gold is a really good hedge against inflation.
So remember that cash, you know,the value of cash gets eroded by
(27:42):
inflation over time. So one kind of trick to hedge
yourself against that is to buy gold because gold historically
has got a nice positive correlation to inflation.
So take your cash, buy gold, wait whatever 10 years, sell
your gold, and you're going to get more money for your gold
because the price has gone up, you know, in line with inflation
(28:03):
is the idea. So inflation rising is positive
for gold. The other one's about yields,
but let's go to the other end ofthe yield curve here because
what's happening is we have a steepening yield curve, so long
duration yields are going up forall the reasons we've just
discussed. But actually short yields are
going down. Why?
Because we're now expecting central banks to cut rates more,
(28:25):
right? Look at the Fed. the Fed are
going to cut rates in a couple of weeks.
We're expecting another cut before the end of the year.
So that's bringing the short enddown.
One reason to not buy gold is that it doesn't yield anything.
It's an inert lump of metal. You don't get an interest off
that, right? So the problem is if bond yields
(28:46):
are really high, well, why buy gold?
You might as well buy bonds where at least you're getting a
nice income off that investment,OK.
But if those yields are dropping, it's like saying,
well, actually, you know, that yield differential is, is, is
narrowing, meaning there's, you know, less of an incentive to
buy bonds and and you could go back to gold instead, right?
(29:06):
But then there's loads of other factors at play here for gold
that are contributing for this move.
And so gold is a safe haven. So, you know, we've just
particularly with the UK, we've painted a pretty bleak picture
there. You know, fiscal risk rising,
you know, economic outlook looking pretty negative.
(29:27):
And, you know, could you extend that globally?
Well, yes, fiscal concerns are certainly a global thing,
economic growth concerns, you know what's going to happen?
Are tariffs going to cause a drag on global growth?
How's the US going to come out of all of this from a growth
situation? So there's plenty of reasons to
be nervous about the outlook going forward.
(29:48):
So you you can hedge that by buying a safe haven asset such
as gold, right? So these are some of the the
kind of factors that are at playhere that's driven gold to a new
all time high. Yeah, as you said, smashing
above that 3500 level earlier this week.
When it comes as well, just to who's buying gold?
(30:09):
Because I think when we talk about it, it's almost like this
abstract thing and you think of just people buying gold as in
normal people. But yeah, one of the
classifications that I saw when I was reading the FT earlier
this week was talking about conviction buyers and
opportunistic buyers. Yeah, you break that down for
me. Like what are they talking about
(30:30):
with those two categorizations? So well, look, gold, right?
It's a bit like yields on the long end.
They've been going up since well, it's it's like 18 months.
Gold has been trending higher, OK, it broke above 2000 bucks at
the start of 2024. And that has just set in motion
almost like an exponential move to the upside.
(30:53):
It was thought back then it was thought that gold can't move
much above 2000 because ultimately it's going to get too
expensive and therefore demand will dampen because people don't
want to pay those more expensiveprices.
The thought was that it was kindof your retail buyers who your,
your India retail market or China retail market.
(31:18):
People thought that that was a really big influence and big
driver for the gold price and they thought that's a natural
cap to the upside because those retail players, they're going to
step out because it's going to get too expensive.
That couldn't have been more wrong.
We broke 2000, then we went 3000, now we're like 3500 and
this thing's still marching higher, right?
So this is where we think, well,OK, who are the buyers then if
(31:41):
it's not the retail side? And this is where that that idea
around this conviction buyer comes from.
That's more like your the, the kind of, I would say
institutional buyers who are buying like gold ETFs, for
example. And that why are they doing
that? They're less concerned about
what's the price today. Oh God, that's really expensive
compared to six months ago. I'm not going to touch that.
(32:03):
Then their strategy is I need gold in My Portfolio as a hedge.
So I'm just, I'm going to buy itwhatever the price is now I need
that as an offsetting balance inMy Portfolio, right?
So you've got a lot of institutional flow, then you've
got a lot of central banks that'll be buying gold.
And that's not just all of a sudden that's again, over the
last few years and that's reallytrying.
(32:24):
That's basically countries trying to, I guess, kind of
reduce their exposure to the US.This all started back actually
in the Russian Ukraine crisis where the US used financial kind
of tariffs against Russia as their kind of tool to apply
(32:44):
pressure. And everyone thought, wow, OK,
hang on. We got, we're we're exposed to
this ourselves, right? And so other countries have set
about kind of just de risking from that.
So they've been buying gold, selling U.S.
Treasuries, for example, and like buying gold, OK.
So that's certainly added to theupside as well.
(33:05):
OK, Got two more questions for you.
When we before we wrap 1 was of course the sell side
institutions were out banging the gold drum with with these
prices doing what they were doing, one of which was Goldman
Sachs. They were putting out the figure
of $5000 an hour. You just said there that there
(33:26):
was a time actually not so long ago that you would have thought
2000 was a big call. We're now talking the fives come
out. It's one of the first times I've
seen that figure. What they said though, just to
put this in some context was they outlined a range of
possible outcomes. This is normally what they do,
their base call and then the range.
(33:47):
The baseline forecast is for a surge to 4000 announced by the
middle of 2026, the so-called tail risk scenario of 4500 and
an estimate of almost 5000. Rationale if just 1% of the
privately owned U.S. Treasury market were to flow
(34:07):
into gold. That's what they're saying.
What do you think? Yeah, I think, I think it's a
good thesis. I mean, one of the reason why
gold is in the press this week is because, yeah, new all time
highs, but it's brought it brokea really key technical level.
So at around 3430, right, That was the high in April, was the
(34:32):
high in June, it was the high inJuly.
You kind of got this triple top that got broken.
All right. Now, at the moment, look, for
all of the reasons we've said, it doesn't look like any of
these catalysts are going away. You know, we are worried about
fiscal sustainability. That worry is not going to end
(34:53):
soon. That's not an easy fix, right?
So inflation's climbing, all right?
The economic outlook we're worried about, you know, all of
these things mean the owning gold, the root, the rationale
for owning gold isn't going to change.
And because of the fact the big buyers and the drivers in the
market aren't the retail side anymore, it means this thing.
(35:16):
Well, I could definitely March higher and actually you'll see
it. Final point, maybe you're seeing
this in the gold miner stock prices.
I said that gold's been marchinghigher, you know, really since I
I would say, yeah, 18 months, right?
But it's only really in the lastcouple of months you're seeing
(35:36):
the share prices in gold miners really start to ramp up as well.
That's quite an interesting sign.
The reason is like, why didn't they rise sooner?
It's because if you think the gold price spike isn't going to
be sustained and gold prices aregoing to come back down, well
then these miners, they don't bother like trying to ramp up
(35:59):
and increase production to take advantage of higher prices if
they think it's just going to betemporary or kind of keep
production kind of stable, OK. What you're seeing now is miners
are ramping up production, meaning they believe these these
levels are absolutely sustainable and they may even
get higher. And so obviously producing more
and selling it at a higher priceis obviously good for revenues
(36:20):
and profits. And so you're now seeing the
share prices in miners rise, which is a really interesting
kind of, I would say confirmation that the direction
of travel for gold isn't going to be down.
And actually, I think Goldman's have got a good story here.
I think there's reasons, compelling reasons that it's
(36:42):
going to continue to March higher.
All right. Conclusion then, not to sound
too sensationalist, but yours isgoing out.
Gold is going out. Is this an erosion of trust in
the two fundamental institutionsthat dictate an economy?
(37:03):
An erosion in the independence of the central bank and the
credibility of the government. Yes, I just think, yes, I'm
like, it's just coming home to roost.
We forked out a huge amount of cash to pay for COVID and look,
(37:29):
you know, it was inevitable. I know people just wanted to
brush the problem under the carpet and forget about it and
pretend it's not there. But it's just, it's just, it's
just coming home to roost. And the inflation crisis, again,
as a result of COVID, meant yields have gone up, loads of
debt, expensive borrowing costs.That's not sustainable.
(37:49):
And the longer it goes on, well,then the bigger concern people
have about it. So that's the direction of
travel. And we're going to carry on
going in that direction because you can't fix these fiscal
problems overnight. And in fact, if anything, the
vicious circle continues. Because worse it gets that's
(38:10):
going to erode the government's favorability political change.
You'll be in the offing as is the normal economic political
tie in terms of the change. So, yeah, yeah, interesting
times. We shall see.
Indeed. All right.
Well, thank you as always, Pierce, you're breaking that
down. So really interesting points
(38:31):
there when you were talking about the four point structure
of why things are happening. So these other bits to unpack.
So lots there. If there's any questions at all,
let us know in the questions or the the comments, I should say
on the episode. And don't forget to subscribe
for more things. There's obviously not just the
budget every week. It seems like it's the end of
(38:51):
days in markets and we'll be here to hopefully explain it in
a nice digestible way. So wishing everyone a fantastic
weekend wherever you are, and we'll see you soon.
Thanks, Piers. Cash loader.
Hello and welcome back to the Market Maker Podcast.
And just to give you a bit of a flavour, as we look to break
down some of the major moves in markets this week, we're going
to focus and start with the UK where long term borrowing costs
have surged to their highest level since 1998.
Sterling also slumped earlier inthe week, investors questioning
(00:24):
whether the government can stickto its fiscal rules.
It's a story of rising debt, persistent inflation, political
pressure. Of course, I think they have now
announced, Piers, the autumn budget late in November.
But this isn't just about UK. Global bond yields are climbing
to with the US and Germany facing their own fiscal strains.
(00:46):
And then there's gold. That's the other talking point
for this week, blasting through $3500 an ounce, a signal that
investors are hedging against something deeper.
Is it fading trust in governmentfinances and central bank
independence while stocks and bonds are looking pretty calm?
The question is, is gold flashing us some sort of warning
(01:08):
sign or not? So, as ever to unpick this,
joined by Piers, how are you? Not bad, yeah, looking forward
to, you know, UK focus today, atleast to start with, which is
good. I'm happy about we normally tend
to lean towards US centric stuff, which, you know, they're
(01:30):
the big boys, so fine. But yeah, good, good to have a
domestic focus today And, and those listeners who aren't in
the UK, you know, good for you guys to get a little insight
into what's happening over here.And yeah, it's, it's, it's, it's
not going to be pretty what we're going to cover, to be
honest, because yeah, we're in abit of a tricky situation, I
(01:53):
would say. So looking forward to diving in.
Yeah, it's interesting as well because a lot of this attention
was earlier in the week and we obviously do our rap at the end
of the week. It's amazing how calm now the
market feels compared to the endof days scenarios that were
definitely flying around. I think it was on Tuesday when
(02:13):
it kind of hit its moment. But yeah, yeah, talk me through
them. Maybe some statistics to kick us
off of of the kind of size of the move, the magnitude and why
the press kind of jumped all over this.
Well, the press jumped all over it, which is why it kind of
feels like, you know, obviously a really big story and that's
(02:34):
really because they could, you know, print headlines like, you
know, yields. It's 30.
Let's let's be clear here, 30 year government bond yields, you
know, reaching, I can't even remember what is it 25 year
highs. I think was the stack.
Basically, you got to go back sort of well around the turn of
(02:55):
the century. 19. 98, Thank you. So look, that's a hell of a long
time, right? So when a market does reach a
price point that it hasn't kind of traded out for such a long
time, obviously it's notable andparticularly when it comes to
the press and when we we kind ofbang the press quite a lot on
(03:18):
this podcast, I'm going to do itagain.
But you know, they love a sensationalist story that's
negative, right? That's that, that's the, that's
the click bait winner. If it's bad news and you can
sensationalize it, then perfect for your your press, right?
So they're all over this becauseyields crack climbing like this
is bad news for the US, for the US, for the UK.
(03:40):
This is kind of really setting alot of things, but borrowing
costs for the UK government, forexample, I mean, it's absolutely
kind of driven by these bond yields at the point at which
they're borrowing and issuing new bonds, right?
The the cost of borrowing to theUK is really a function of, you
know, what are the yields out there in the marketplace right
now. So basically in simple terms, it
(04:02):
hasn't been this expensive for the UK to borrow money for the
whole of the century. It's the most expensive since
1998 and when we've already got a lot of debt and when we've
already got a kind of deficit because obviously COVID, you
know, governments, they're extreme sort of intervention
cost huge amounts of money. So obviously debt levels rose
(04:25):
right across the planet. That's not auk, you know, thing
only, of course. So this is the problem, rising
borrowing costs when you've already got a load of debt.
And that's why it's kind of, yeah, a bit alarming.
I mean, what the press didn't say was that the last time the
UK 30 year bond yield hit a 27 year high was on the 19th of
(04:54):
August, so literally 2 weeks before and then and actually the
bond market has been climbing like this and it's been trending
higher for 3 1/2 years. So it's an ongoing extension of
a 3 1/2 year story. It's just that this trend is now
(05:14):
reaching levels, as I said, thatwe haven't seen for for, you
know, 27 years. And I was going to ask you that
why did because on, I think it was Tuesday, the pound dropped a
lot and it looked like the sort of chart that you would think,
wow, there's a new piece of information that's come out.
It didn't look somewhat inevitable that we're going to
(05:36):
hit these levels. Yields have been rising for some
time. I know a lot of people were
talking about the the shake up at Downing St.
Was that, Yeah, was that not perhaps the reason, but the
catalyst with the pound it was. I think it was the catalyst
coupled with, you know, a breakout in that yield like
technical now a technical breakout, you know, meaning that
(05:59):
it yes, made another new high. But, you know, that can often
just attract in more buyers because, you know, buy signals
start flashing as it breaks up through a ceiling.
Well, so you can get a bit of anacceleration, right?
Couple that with so that, you know, it was kind of triggered
by the government shaking up their Treasury Department.
(06:22):
So why do that? Well, clearly the people that
were in those roles weren't doing a good job.
Why is that a problem? Because the government's in
charge of our finances. And if they've got rid of the
team that were in charge becausethey weren't very good, well,
then surely that's a concern, right?
And maybe the government can't be trusted and maybe their
fiscal kind of credibility took a bit of a whack there, which
(06:45):
triggered then spike hiring yields.
And because it, it was quite a rapid move then it kind of kind
of I guess cascades through other markets then.
So the pound got whacked, as yousay, it actually sold off about
200 pips in pretty short order. This is back on the 2nd of
September, so 200 pips in in a day.
(07:06):
That's a lot, right? That's an unusually large move.
I would say it's recovered 3/4 of that sell off.
I'm I'm just looking against thedollar only here, right?
So back on on Tuesday, it was trading at 13530, let's say, so
1.3530 and then it dropped to 133, 50 and it's recovered 3/4
(07:29):
of that. So yeah, quite a short sharp
move triggered by that government announcement.
The media jumped all over it. We had a kind of breakout on the
upside on the 30 year yield thattriggered kind of correlation
moves in other markets. And all of a sudden, you know,
there's a little bit of a momentum story behind this sort
(07:52):
of, let's call it a mini panic. And it was very, very mini
whatever. If there's a word in a minuscule
is maybe even a better term, right?
A minuscule panic. And now things have just calmed
down because look, all of this, all of this stuff that the press
have decided to shine, shine a light on earlier in the week.
It's, it's just business as usual.
This has been happening for 3 1/2 years.
(08:15):
So it's not actually new. So.
I read a piece from Deutsche Bank and you've talked about
this before and it was talking about this slow moving vicious
cycle circle. And perhaps you could explain
it. And this is that idea that these
concerns, these debt concerns push yields up.
(08:37):
But then the dynamic, given the limited fiscal headroom that the
UK government currently has for the reasons you described, one
thing makes the other worse and then it comes back and it's it
kind of snowballs. Yeah, it's like a negative
feedback loop that then it's a vicious cycle.
So this is how it works. Remember, those bond yields
(09:01):
rising means that borrowing costs go up.
Right now, why do borrowing costs, why, why are they going
up? We'll maybe touch on that after.
There's a few reasons here, particularly the UK.
Look, these yields are rising right across the globe.
So you know, everyone's pretty much certainly G7, right?
(09:21):
The, the major economies, their yields are rising as well.
But the UK is a little bit rising faster for particular
reasons. We're going to go into that.
But look, here's the negative feedback loop.
If look, think about the, the lender now, right?
So remember these government bonds, that's the vehicle by
which the UK government borrows money.
So they issue bonds and then they sell bonds to investors,
(09:44):
banks, you know, other governments like international
investors and so on, right? And basically the investors are
buying the bonds, meaning they're lending the money, OK?
Well, now in any loan situation,the lender, it has credit risk,
OK, And that's because the borrower, well, how credit
worthy is the borrower? And what's the chances of me
(10:06):
getting my money back? Am I going to get paid the
interest payments for the lifetime of the loan?
Am I going to get my money back at the end of the loan, right.
These are quite key, obviously key questions for the borrower.
So when it comes to governments,you're thinking right, well,
what shape is the UK economy in?You know, what shape is the
current fiscal situation in? Is the government credible?
Are they doing a good job? You know, all these factors are
(10:29):
kind of wrapped up into that kind of credit risk analysis
right now. If you start to worry that
things aren't going in a particularly good direction for
the UK, then as a lender you're thinking, yeah, well, you know,
the credit risk is rising here. So if I, if I the investor, I'm
going to lend you money, the UK,that risk is going up.
(10:51):
So I require a higher interest rate to compensate me for the
greater risk. OK, So that's the mechanism.
Now, the problem is, of course, if the yields rise, well, that
makes borrowing more expensive, which makes the fiscal situation
worse, right? So then, well, that means the
(11:12):
risk has gone up, so investors need more return.
So I'm going to lend to you, butI'm going to need more, more,
more interest, right? So then interest rates go up
more, but then that makes the fiscal situation worse, which
means lenders need more money, which means the fiscal situation
gets worse and and it kind of itcan ratchet up and spiral.
(11:32):
Now, it's crazy to be talking about this with regards to the
UK, like a major economy, OK, This kind of stuff is normally
reserved for your emerging market.
That's kind of got into some fiscal difficulty.
Like Argentina, right, over the years has required an IMF
bailout multiple times because they haven't been paid.
(11:55):
They've got to a fiscal situation where they can't
afford it anymore because there's a limit, right?
You can only borrow money at an interest rate that you can
afford. And that's the kind of tipping
point. If that interest rate claims, if
these yields climb to a point where, hang on, it's completely
unaffordable, then the whole thing collapses and then
(12:15):
investors stop lending to you entirely.
But you need money because we'vegot a debt to service and a
deficit. And so this is where then you
need a bailout. And that's where they are.
And that's what the International Monetary Fund is
for, is to try and backstop someof this kind of kind of default,
you know, scenarios. So look, the UK is not, they're
(12:36):
not there, right? The the yields we're talking
about, obviously we're not, we're not at that point.
The yield's at 5.553% on the 30 year, OK.
So, you know, we're not at the point of, of the tipping point,
but it's the direction of travel, OK.
And you know, has the risk of UKdefaulting on its debt gone up?
(12:59):
Yes, it has, But it's gone up from a very low tiny minuscule
risk to a slightly less minuscule risk, OK.
And so this is what's happening.Yeah, so there, there's a bit of
a split here to to read or interpret the news because I, I
was it Kenneth Clarke or who, who was it that said the IMF
bailout comment? But it was it was I think it was
(13:21):
a Tory, former Tory member. That's right.
And so, yeah, from an optics point of view, it's just a very
simplistic way of attacking the incumbent kind of government.
But for the reasons you said, which are supported by evidence,
because I did see that there wasa record £140 billion for a £14
(13:43):
billion guilt syndication. Now just explain to me what that
is because a lot of people mightgo, oh, what's a guilt?
What's a guilt syndication? Why is there record orders?
But I mean that very much validates kind of what you're
saying, right? Yeah.
I mean, so remember the government has a deficit that
means that it the budget for this year and you mentioned
(14:05):
something fiscal headroom you mentioned a minute ago and
that's basically when the government sets out it's budget
for spending for the year, it'llhave a bit of headroom IEA
margin for error. So that you know, there's a
little bit of contingency there,right, in terms of how much we
we're going to spend this year versus how much we're going to
borrow. Their headroom is dropping and
dropping and dropping. And that's because the economic
(14:28):
situation and, and the cost of borrowing and so on has changed
as we go through the year. And it's changed in a bad way,
meaning their contingency is kind of dropping to wafer thin.
And again, This is why the pressare on it because now there's
literally no, now there's no margin for error.
Now in the final, what? Well, we've got to get to
November, right? So really we've got two months
(14:51):
to kind of get to that point where they then issue another
budget. So look, the, the, the head,
the, the contingency's almost gone, right?
But, but look, I would say that,you know, let's, let's explore
why this is happening. You know, so it is happening.
So why? And the underlying drivers, I
would say, are kind of, there's kind of four in my mind, I would
(15:15):
say that debt and deficit sustainability is an issue.
That's not just the UK, right? So we've got countries all over
the world whose debt situations have got worse because of COVID,
right? So this one isn't exclusive to
the UK. We've got a lot of debt.
We've got a deficit. And look, we're worried the
(15:37):
government might not be able to kind of steer this ship, you
know, hence that story earlier in the week with Starmer
changing up. It's kind of Treasury team,
right? So that's one.
Number two, inflation. So inflation is rising, OK, and
it's rising more in the UK than other countries.
So this is a kind of you one of the issues why the UK bond
(15:59):
yields are rising faster than others.
So right now we've got an inflation rate in the UK at
3.8%. Kind of comparing that to the
other G7, it's 2.7 in the states, Germany's 2.2, Japan's
3.1 for example, Italy and France, well, France is nought
.9 right? So our inflation is higher than
others. Now what happens there is if
(16:20):
inflation rises, well then againthat that has an impact on what
we call the long end of the yield curve.
So long duration bond yields will rise.
And that's because inflation erodes the value of money,
right? So if you're going to lend money
for a long time and inflation's high, when you get that loan
returned to you, the value of the money's gone down.
(16:40):
So you need compensating for that and that's what you get
this yield for. OK, so, so inflation's a key
problem and and the trend on inflation is not looking great,
right? In the UK, inflation's been
trending higher for 12 months now.
Next. Well, what's the economic
situation and what's our expectations about how the
economy is going to perform going forwards?
(17:02):
Because look, the government hasdebt and a deficit, but if the
economy grows really powerfully well, then that means the
government's receiving increasedrevenue through more tax, right?
If companies are making more profit, that's more corporation
tax. If people are buying more stuff,
that's more sales tax and so on,right?
So is the economic expectations looking positive for the UK?
(17:24):
No, not really. So again, I don't think the
economy is going to come to the rescue here, right?
So kind of remove that and then you're left with something
called the current account deficit.
And again, this is a Auk specific problem relative to the
other G7 nations. Now what is a current account
(17:45):
deficit? That's looking at the difference
between how much, how much goodsyou, what's the value of the
goods you import versus the value of the goods that you
export. OK, Now for the UK, we have a
wide current account deficit. OK, now to put numbers on it,
our deficit is -2.7% of GDP. So the value of that difference
(18:08):
between imports and exports is 2.7% of GDP.
It means we import more stuff than we export.
It's actually only the US that'sgot, you know, out of the lead
big economies. It's only the US that has a
larger current account deficit. That's -3.9%.
OK, Others for example, like let's take Europe.
Germany has a really strong positive current account surplus
(18:30):
at 5.7%. Japan has a big surplus 4.7%.
Why? Because they export a load of
stuff. They import stuff as well.
But think about the automotive industry.
You know, you've got your big giant German automotives, you've
got your big giant Japanese automotives.
One example there as to why those countries have a slightly
(18:50):
different kind of ratio between imports and exports.
So for whatever reason, over thedecades and decades, the UK has
shifted more to a services kind of lead economy, which means we
don't manufacture as much stuff anymore, which means we don't
export as much stuff anymore. But we're importing like crazy.
(19:11):
So we have this this deficit that's wider than others.
Why is that important? Well, it means you're more
reliant on foreign investment. Because think about it, let's
say, I don't know, super simple example.
Let's say we buy £100 worth of imports, right, from foreign
suppliers. That means there's £100 going
out of the country to pay for those imports, right?
(19:33):
Then let's say we're exporting less.
So let's say we export £80 worthof stuff where you get 80 lbs
coming back in, OK, as your international buyer pays for
that stuff, right? But that's a 20 LB gap.
You got to, you know, that moneyjust doesn't vanish.
You've got to kind of balance the books, right?
So where does the 20 lbs need tocome from?
(19:54):
Well, it needs to come in to thecountry from outside and that
often comes through foreign investors buying UK gilts, gilts
being the name for UK governmentbonds.
So that's where we get this kindof inflow of money from
international investors to kind of balance the books if you
like. So we're just more dependent on
(20:17):
foreign investors than other countries because our current
account deficit is wider. Why is that a problem?
Well, if the. Fiscal kind of situation in the
UK deteriorates. It's the foreign investors that
kind of vanish first. They're the ones that head for
the hills, right? Especially, you know, if you're,
(20:40):
yeah, domestic is a little bit different, but it's the foreign
investors that kind of pick up their sticks and head home first
in a fiscal crisis. And so because we're more
dependent on those, it's just a little bit more risk for us,
which means another feeder into why the UK 30 year bond yield is
rising and it's rising faster than you're seeing in other
(21:02):
countries. That last point, would that
explain why Starmer was one of the first to cut a deal with
Trump with these trade tariffs? Well.
Actually the UK is very unusual in that we actually import more
stuff from the US and we export to the US, the US being the
(21:25):
biggest economy, one of the key reasons why we've got a current
account deficit, you know, unlike which is wider than most
others. So I don't think it really
matters from a, a current account point of view
necessarily. I just think we've obviously got
a historically very strong relationship with the US and the
the tariff thing was less risk for us for those reasons
(21:46):
because, because we actually import more than we export to
the US. So I think Starmer just wanted
for optics reasons probably to just get a deal done early
doors, which was the right thingto do in hindsight because our
tariff rate is lower than what you're seeing, you know, in
these negotiations and agreements with the likes of
whatever Japan and the EU and soon, whose tariff rate is 15% and
(22:10):
we agreed at 10. How much emphasis, then, are you
putting on this autumn Budget? Yeah.
So this is like the Autumn Budget, right?
This is where the government announces, right?
What's our spending plan for 2026 and how are we going to
afford it? Where are we going to get the
money from? I think this is, it's the most
(22:33):
important budget since last year, but last year's budget was
the most important budget for decades, in my opinion, right?
Because you have the Labour government coming in and they
did some radical stuff by increasing taxes to try and, you
know, fill the hole between, youknow, the budget spending and,
and the amount of revenue comingin.
I think this time in November, they look the UK government that
(22:57):
they're not doing well, particularly fiscally.
So they're going to have to, they're going to have to raise
tax. And this is obviously a very
unpopular thing to do. It's just which taxes?
But yeah, a lot of people in theUK are very apprehensive going
(23:17):
into that budget because what itwill mean for them from a tax
point of view was a real concern.
And of course, we talked about the economic outlook.
You know, if you get taxed more,well then of course you got less
disposable income. So it's one key reason why we're
just a little bit nervous about the economic trajectory, because
we don't know what the government's going to do.
Looks like they're going to haveto raise tax because the fiscal
(23:39):
situation's in a mess and so yououtlook for growth going
forwards is a bit depressing. I can't speak on behalf of the
broader public but thinking of financial services, which is the
industry we work in. Any of your friends left the UK,
gone to Dubai or anything like? That one friend has.
(24:04):
You've almost hit the nail on the head.
He went to Abu Dhabi, actually. James Wright, keen listener to
the pod. So hi.
Hi, Jim. Yeah, He, he moved.
Not for these fiscal reasons, though.
It's more for a job, job offer. But yeah, I, I don't know, I
don't think it's not like panic stations, you know, it's not
like, Oh my God, pack your bags and leave.
(24:27):
Immediately, the ability to alter taxes, which is going to
probably impact us, everyone. And for that current account
deficit, that's a bad news because we need foreigners
coming in. We need, we need foreign
investors buying, I don't know, property in the UK that helps
(24:47):
with balancing that the books, right.
But if they're if they massivelyraise the tax, stamp duty tax,
which is the tax we have for buying property, right?
If they raise that well, then less, less foreign buyers are
going to buy property, right? And then that's bad news again
for the current account. So yeah, it's, I just, I don't
know how the, the government aregoing to, I don't know how
(25:08):
they're going to sort this out, but they've got a really big
problem. And so whilst it's not like
crisis Armageddon, you know, just around the corner, it's the
direction of travel and it's thelack of ideas for, you know, a
strategy. There's no what's the strategy
here? So we just need to figure out a
strategy and then start deploying it sharpish.
(25:30):
So we've got about a two-month holding pattern basically.
We can't really make any great big assumptions.
You had this panic at the beginning of the week.
Everyone's now aware of this situation, let's say.
And so we just got to wait untilthe end of November till we hear
the budget as to where this goesnext.
(25:51):
Yep. And maybe longer term or let's
say medium term, you know, does something come out of nowhere to
kind of come to the rescue here,such as the AI revolution, you
know, does that lead to a genuine improvement in
productivity, which is somethingthe UK, you know, our
productivity levels have been, you know, really low for years.
(26:15):
And can we get a revival in productivity which can lead to a
more accelerated economic growthstory?
But watching a straws here. Yeah, he'd lacks exactly.
All right, Well, look, let's have a good segue then into gold
because people are often lookingat, you know, trying to curve
fit narratives as to why gold ismoving.
(26:36):
And certainly, you know, as yields have been on this pretty
persistent rise on a global level, gold equally has
continued to move higher and it's gone through $3500 an
ounce. But stocks generally quite,
quite steady overall. Just wanted to understand like
(26:57):
your rationale of what is going on with gold and how is that
connected to some of this conversation we've been having?
Well, so it's connected on 2 fronts to the conversation we've
just had. I would say, firstly, I was
talking about inflation. So inflation is back on the rise
like generally around the world.But as we've said more rapidly
in the UK, there's nothing like the inflation crisis we had back
(27:20):
in 2022, right? To and to and to quantify that
in 2022, the UK inflation peakedat 11 percent.
We're now, it's on the rise now,but it's at 3.8, right?
So it's obviously nothing like that inflation crisis.
But gold is a really good hedge against inflation.
So remember that cash, you know,the value of cash gets eroded by
(27:42):
inflation over time. So one kind of trick to hedge
yourself against that is to buy gold because gold historically
has got a nice positive correlation to inflation.
So take your cash, buy gold, wait whatever 10 years, sell
your gold, and you're going to get more money for your gold
because the price has gone up, you know, in line with inflation
(28:03):
is the idea. So inflation rising is positive
for gold. The other one's about yields,
but let's go to the other end ofthe yield curve here because
what's happening is we have a steepening yield curve, so long
duration yields are going up forall the reasons we've just
discussed. But actually short yields are
going down. Why?
Because we're now expecting central banks to cut rates more,
(28:25):
right? Look at the Fed. the Fed are
going to cut rates in a couple of weeks.
We're expecting another cut before the end of the year.
So that's bringing the short enddown.
One reason to not buy gold is that it doesn't yield anything.
It's an inert lump of metal. You don't get an interest off
that, right? So the problem is if bond yields
(28:46):
are really high, well, why buy gold?
You might as well buy bonds where at least you're getting a
nice income off that investment,OK.
But if those yields are dropping, it's like saying,
well, actually, you know, that yield differential is, is, is
narrowing, meaning there's, you know, less of an incentive to
buy bonds and and you could go back to gold instead, right?
(29:06):
But then there's loads of other factors at play here for gold
that are contributing for this move.
And so gold is a safe haven. So, you know, we've just
particularly with the UK, we've painted a pretty bleak picture
there. You know, fiscal risk rising,
you know, economic outlook looking pretty negative.
(29:27):
And, you know, could you extend that globally?
Well, yes, fiscal concerns are certainly a global thing,
economic growth concerns, you know what's going to happen?
Are tariffs going to cause a drag on global growth?
How's the US going to come out of all of this from a growth
situation? So there's plenty of reasons to
be nervous about the outlook going forward.
(29:48):
So you you can hedge that by buying a safe haven asset such
as gold, right? So these are some of the the
kind of factors that are at playhere that's driven gold to a new
all time high. Yeah, as you said, smashing
above that 3500 level earlier this week.
When it comes as well, just to who's buying gold?
(30:09):
Because I think when we talk about it, it's almost like this
abstract thing and you think of just people buying gold as in
normal people. But yeah, one of the
classifications that I saw when I was reading the FT earlier
this week was talking about conviction buyers and
opportunistic buyers. Yeah, you break that down for
me. Like what are they talking about
(30:30):
with those two categorizations? So well, look, gold, right?
It's a bit like yields on the long end.
They've been going up since well, it's it's like 18 months.
Gold has been trending higher, OK, it broke above 2000 bucks at
the start of 2024. And that has just set in motion
almost like an exponential move to the upside.
(30:53):
It was thought back then it was thought that gold can't move
much above 2000 because ultimately it's going to get too
expensive and therefore demand will dampen because people don't
want to pay those more expensiveprices.
The thought was that it was kindof your retail buyers who your,
your India retail market or China retail market.
(31:18):
People thought that that was a really big influence and big
driver for the gold price and they thought that's a natural
cap to the upside because those retail players, they're going to
step out because it's going to get too expensive.
That couldn't have been more wrong.
We broke 2000, then we went 3000, now we're like 3500 and
this thing's still marching higher, right?
So this is where we think, well,OK, who are the buyers then if
(31:41):
it's not the retail side? And this is where that that idea
around this conviction buyer comes from.
That's more like your the, the kind of, I would say
institutional buyers who are buying like gold ETFs, for
example. And that why are they doing
that? They're less concerned about
what's the price today. Oh God, that's really expensive
compared to six months ago. I'm not going to touch that.
(32:03):
Then their strategy is I need gold in My Portfolio as a hedge.
So I'm just, I'm going to buy itwhatever the price is now I need
that as an offsetting balance inMy Portfolio, right?
So you've got a lot of institutional flow, then you've
got a lot of central banks that'll be buying gold.
And that's not just all of a sudden that's again, over the
last few years and that's reallytrying.
(32:24):
That's basically countries trying to, I guess, kind of
reduce their exposure to the US.This all started back actually
in the Russian Ukraine crisis where the US used financial kind
of tariffs against Russia as their kind of tool to apply
(32:44):
pressure. And everyone thought, wow, OK,
hang on. We got, we're we're exposed to
this ourselves, right? And so other countries have set
about kind of just de risking from that.
So they've been buying gold, selling U.S.
Treasuries, for example, and like buying gold, OK.
So that's certainly added to theupside as well.
(33:05):
OK, Got two more questions for you.
When we before we wrap 1 was of course the sell side
institutions were out banging the gold drum with with these
prices doing what they were doing, one of which was Goldman
Sachs. They were putting out the figure
of $5000 an hour. You just said there that there
(33:26):
was a time actually not so long ago that you would have thought
2000 was a big call. We're now talking the fives come
out. It's one of the first times I've
seen that figure. What they said though, just to
put this in some context was they outlined a range of
possible outcomes. This is normally what they do,
their base call and then the range.
(33:47):
The baseline forecast is for a surge to 4000 announced by the
middle of 2026, the so-called tail risk scenario of 4500 and
an estimate of almost 5000. Rationale if just 1% of the
privately owned U.S. Treasury market were to flow
(34:07):
into gold. That's what they're saying.
What do you think? Yeah, I think, I think it's a
good thesis. I mean, one of the reason why
gold is in the press this week is because, yeah, new all time
highs, but it's brought it brokea really key technical level.
So at around 3430, right, That was the high in April, was the
(34:32):
high in June, it was the high inJuly.
You kind of got this triple top that got broken.
All right. Now, at the moment, look, for
all of the reasons we've said, it doesn't look like any of
these catalysts are going away. You know, we are worried about
fiscal sustainability. That worry is not going to end
(34:53):
soon. That's not an easy fix, right?
So inflation's climbing, all right?
The economic outlook we're worried about, you know, all of
these things mean the owning gold, the root, the rationale
for owning gold isn't going to change.
And because of the fact the big buyers and the drivers in the
market aren't the retail side anymore, it means this thing.
(35:16):
Well, I could definitely March higher and actually you'll see
it. Final point, maybe you're seeing
this in the gold miner stock prices.
I said that gold's been marchinghigher, you know, really since I
I would say, yeah, 18 months, right?
But it's only really in the lastcouple of months you're seeing
(35:36):
the share prices in gold miners really start to ramp up as well.
That's quite an interesting sign.
The reason is like, why didn't they rise sooner?
It's because if you think the gold price spike isn't going to
be sustained and gold prices aregoing to come back down, well
then these miners, they don't bother like trying to ramp up
(35:59):
and increase production to take advantage of higher prices if
they think it's just going to betemporary or kind of keep
production kind of stable, OK. What you're seeing now is miners
are ramping up production, meaning they believe these these
levels are absolutely sustainable and they may even
get higher. And so obviously producing more
and selling it at a higher priceis obviously good for revenues
(36:20):
and profits. And so you're now seeing the
share prices in miners rise, which is a really interesting
kind of, I would say confirmation that the direction
of travel for gold isn't going to be down.
And actually, I think Goldman's have got a good story here.
I think there's reasons, compelling reasons that it's
(36:42):
going to continue to March higher.
All right. Conclusion then, not to sound
too sensationalist, but yours isgoing out.
Gold is going out. Is this an erosion of trust in
the two fundamental institutionsthat dictate an economy?
(37:03):
An erosion in the independence of the central bank and the
credibility of the government. Yes, I just think, yes, I'm
like, it's just coming home to roost.
We forked out a huge amount of cash to pay for COVID and look,
(37:29):
you know, it was inevitable. I know people just wanted to
brush the problem under the carpet and forget about it and
pretend it's not there. But it's just, it's just, it's
just coming home to roost. And the inflation crisis, again,
as a result of COVID, meant yields have gone up, loads of
debt, expensive borrowing costs.That's not sustainable.
(37:49):
And the longer it goes on, well,then the bigger concern people
have about it. So that's the direction of
travel. And we're going to carry on
going in that direction because you can't fix these fiscal
problems overnight. And in fact, if anything, the
vicious circle continues. Because worse it gets that's
(38:10):
going to erode the government's favorability political change.
You'll be in the offing as is the normal economic political
tie in terms of the change. So, yeah, yeah, interesting
times. We shall see.
Indeed. All right.
Well, thank you as always, Pierce, you're breaking that
down. So really interesting points
(38:31):
there when you were talking about the four point structure
of why things are happening. So these other bits to unpack.
So lots there. If there's any questions at all,
let us know in the questions or the the comments, I should say
on the episode. And don't forget to subscribe
for more things. There's obviously not just the
budget every week. It seems like it's the end of
(38:51):
days in markets and we'll be here to hopefully explain it in
a nice digestible way. So wishing everyone a fantastic
weekend wherever you are, and we'll see you soon.
Thanks, Piers. Cash loader.
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