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Adrian Ash, reporting from the corner of Marigold Alley

in London:

- "It's simple liquidity," said Andrew Vaughan of the

Zurich Club to your editor yesterday afternoon. "Gearing

in the City is massive right now. Everything's being

bought with borrowed money."

- "You might think the yen carry trade is over," he went

on – "and you might guess that risks an end to the

global asset-price boom. But borrowing costs are still

low-to-zero if you take the real rate of inflation into

account. So there's a huge amount of cash out

therelooking for a home. Your readers better make hay,

rather than sit it out."

- Sitting it out only seems a wise policy until you have

missed out, of course. So in the spirit of bubble

markets everywhere your editor asks: Just how is the

global asset-price boom today?

- Well, the FTSE closed back above 6,000 last night.

Tokyo's Nikkei index rose 1.6% to a near-six year high.

Brent crude oil shot another buck higher to $66.84. Gold

added $6.70 to yet another fresh 25-year high above $590

an ounce...

- For sterling investors like you and me, in fact, the

London afternoon fix has priced an ounce of gold higher

only twice before...on either side of that fateful

weekend, 19/20 January 1980.

- "It's World War Eight if you believe the market," said

one trader during that spike of 26 years ago. Russia had

just invaded Afghanistan. The price of oil was spitting

towards its all-time high. Britain had crashed into

recession...yet bond prices collapsed...and the price of

gold was about to break above $850 an oz.

- Fast forward to today, and the newspapers tell us that

Iran is testing new missiles in the Straits of

Hormuz...President Chavez has nabbed and nationalised

key oil assets in Venezuela...and more rig workers have

been kidnapped in Nigeria. But this litany alone doesn't

make todday a good day to buy gold. Two months on from

its last oil-crisis spike of Jan '80, the metal had

dropped more than 20% of its value against the pound in

your pocket.

- It's never recovered that peak versus sterling. Well,

not until now that is...

- "History doesn't bode well for the value of sterling

on the international currency markets," reports Brian

Durrant for the Fleet Street Letter. "Nor is it good for

Britain's inflationary outlook. On Tuesday last week US

interest rates were set at a higher level than UK

interest rates for the first time since January 2001."

- This situation – of higher US than UK rates - has been

a rare event over the last 30 years, says Brian. But

just as black swans can be equally vicious in defending

their young as their white-feathered cousins, so the new

GBP/USD situation could soon take a bite out of unwary

British investors.

- Brian Durrant: "Although the markets have been

anticipating this week’s development since last summer,

the actual act of rates crossing over is significant.

[it] means that the US dollar has replaced the pound as

a high yield currency of choice for the global flow of

'hot money'. A similar thing happened last year in

Scandanavia, with shocking consequences..."

- "A 0.5% cut in interest rates by the Riksbank saw

Swedish interest rates dropping below their Norwegian

equivalent," says Brian, "making the Swedish krone more

popular than the Norwegian krone as a currency to borrow

in a carry trade. So from February to November last year

the Norwegian currency rose against its Swedish

counterpart by over 15%."

- The potential exodus of hot money from British to US

dollar-denominated assets may be even greater, of

course, than for an esoteric currency pair like the

Scandinavian krones. "Historically," notes Brian, "the

path of GBP/USD has been heavily influenced by interest-

rate differentials between the UK and US. Since October

1977, according to a friend at HSBC, US rates have

exceeded UK rates for only 127 weeks, roughly one-

twelfth of the time. Yet during this short space the

pound has fallen by 30% against the dollar."

- Put another way, whenever US rates exceed UK rates the

pound falls against the dollar at an average rate of 12%

per year. And if gold is set to keep rising in dollar

terms, then the gains for British investors looking to

defend their wealth against weak sterling could prove

that much larger.

- "Look at Britain’s external asset position today,"

Brian goes on. "The scope for a serious outflow of money

from the pound is substantial. The UK's largest

component of net assets is direct investment overseas.

These are long-term investments that are difficult to

switch overnight. On the other hand, Britain has a

larger net liability position in 'other assets' -

primarily short-term deposits or so-called hot money. By

their very nature these assets can be switched into

dollars at the touch of a button."

- UK external liabilities in the form of 'hot money'

deposits have sky-rocketed since exchange controls were

abolished in 1979. In 1980 they totalled about £150bn;

by 1989 they were £500bn; by 1996 they were £1,000bn;

and they now stand at approximately £3,000bn,

representing a 20-fold increase in 26 years.

- "The level of 'hot money' deposited in the UK is not

only exceedingly large," warns Brian, "its flows can be

extremely volatile. For example the volatility of flows

of 'other assets' measured in the data is nearly six

times greater than the flows on direct investment and

five times as volatile as investments in bonds."

- In short, concludes Brian – investment director of the

Fleet Street Letter - the UK has become home to an

enormous amount of hot money which can easily be

switched into dollars now that US interest rates are

higher. "The upshot is that sterling is vulnerable to a

fall - and any balanced portfolio should have an

exposure to non-sterling denominated assets."

- And so the case for gold just keeps getting stronger.

Yes, it's doubled for British investors since 1999. But

inflation-adjusted, the Jan 1980 peak would mean a price

of £858 in today's worthless money.

- Buy an ounce of gold today, gentle reader, and you

might regret it tomorrow. Sit out this bull market,

however, and you might come to regret it for weeks,

months, even years to come...

[Editor's Note: Not joined the Trade of the Decade yet?

Gold's 5-year bull run shows no signs of slowing down.

One expert says it could rise five-fold from here! To get

all the details you need to invest in the metal, read on below:


Past performance is no guide to future success. Never risk

more than you can safely afford to lose...]

Want more? Go to our website now:


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Edited by megaflop

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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