In the West, the general public tends to trust the strength and integrity of our financial system with the unquestioned faith of, frankly, a cult. If this wasn't the case, fiat currencies like the U.S. dollar would already have succumbed to their inevitable death. This faith holds despite the increasingly frequent financial crises and good reasons to be skeptical.
In times when even the most hardcore believers have their devotion to fiat currencies tested, such as is happening right now with the British pound sterling, there is always the financial palliative of gold to turn to.
Ever since the U.K. voted to leave the European Union in late June, the pound has seen its value in the foreign exchange markets quickly erode to three-decade lows. Compared to trading near $1.50 prior to the vote, the currency stands more than 15% lower today, sinking below $1.22. Even after the initial fallout from Brexit seemed to subside, there was another "flash crash" of the pound in early October that it has yet to fully recover from.
The Bank of England's governor, Mark Carney, has been one of the vocal naysayers of the Brexit decision. He has been roundly criticized for his stance—particularly now that third-quarter GDP numbers in the U.K. appeared to show resilience, registering an encouraging +0.5%. As the stability of the GBP continues to come into question, the central bank chief (who also served as the governor of the Bank of Canada previously) the may now be planning to move on from his post.
Carney's possible departure is not without its sensible considerations, the better-than-expected GDP reading notwithstanding. British manufacturers and London's renowned banking industry are mulling a mass exodus now that trade from the U.K. will be more isolated from Europe and the rest of the world that trades with the Common Market. British retailers are dramatically hiking their prices in order to make up the ground that the pound sterling has lost.
Gold Serves Its Purpose
Although the government has extended subsidies to help certain firms (such as Nissan) keep their business in the U.K., it's untenable for such help to be provided across the economy. Moreover, now British consumers are getting significantly less punch for their pound—not to mention their savings are worth less now.
In terms of GBP, the price of gold has skyrocketed the opposite direction. Over the course of the year, gold priced in pounds has risen from about £700 to £1,050. In fact, gold spiked from £850 to its highest level since 2013 immediately following the Brexit vote on June 23rd. So, for those who converted their pounds into bullion at some point, their purchasing power has been shielded from the currency crisis—and even netted a tidy profit.
This is another great example of how gold is a stable store of wealth when currencies lose their purchasing power. Since fiat currencies will always move toward worthlessness as time passes, gold is the ideal way to protect your wealth from a crisis like we're seeing in the U.K.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.