Transatlantic blues

As the northern hemisphere summer edges towards colder months, harsh reality is starting to dent optimism on both sides of the Atlantic. The gold price has trod water for the past week, seemingly waiting to see just how cold it may get. It's likely to be very chilly in both the US and the UK.

The honeymoon for Sir Keir Starmer, the UK's Prime Minister for just 58 days, was very short. He is now disapproved of by more than half the populace according to one opinion poll. In another, his approval rating has plunged from +6 in early August to -16 today. How much this collapse is due to his statement that things generally will get "worse before they get better" and that the Labour government he leads will deliver a "painful" budget on 30 October is anyone's guess. Rachel Reeves, Starmer's Chancellor (or Treasury boss) has said there is a shortfall of £22 billion (more than $29 billion) in the current fiscal year. Is this grim view a preliminary softening-up of the public, readying them for higher taxes and/or public sector cuts?

In the US the forthcoming US Presidential election looks as tight as ever; the Democrat contender, Kamala Harris, has benefited from almost universal relief that Joe Biden has stepped aside as well as a supine mainstream media, and is now polling slightly ahead of the Republican nominee, Donald Trump. Yet whoever is victorious in November will inherit a dismal prospect. The Congressional Budget Office (CBO) projects that the 2024 fiscal year will see a budget deficit of $1.9 trillion, or 7% of gross domestic product (GDP) - twice the average of the past 50 years.

Squeeze the kulaks

'Kulak' was the contemptuous Russian term in the early 20th century for a peasant who dared to be richer, or was luckier than, than the mass of the peasantry. In the Russian revolution the kulaks were deemed 'bloodsuckers' by Lenin's Bolsheviks, and fit only for severe expropriation - the state could squeeze them until nothing was left.

Fortunately for us we live in democracies, where we can exercise control over those elected to power. We are not kulaks. Yet our governments may find it almost impossible not to squeeze as much revenue as possible from our pockets, in a kind of 'kulak-lite' policy. Like a frog dropped into cold but warming water, the overall tax burden in the UK has almost imperceptibly crept up to the highest since 1950, according to the Institute for Fiscal Studies (IFS). High earners, those in the top 1% of income tax payers, now pay almost a third of all the UK's income tax, up from 21% at the start of this century. Probably not much more can be squeezed from that top 1% without stifling economic growth or inducing capital flight. In Western Europe average earners have long been taxed more heavily than their counterparts in the UK or US; our kulaks may be in the sights of Keir Starmer's government or, if she becomes the next President, that of Kamala Harris.

UK government revenues

Inflation's lingering pain

For Americans the impact of high inflation - it reached 8.5% in June 2022 - lingers on. One (admittedly small, just 200 responses but nationally representative) survey found recently that 74% of those sampled thought that inflation is erasing their hard work. The non-profit research organization the Conference Board August index survey found that consumer confidence was the highest since February, although the survey showed some nervousness about employment. The US Consumer Price Index (CPI) in July was an annualized 2.9% but housing costs are still running at more than an annualized 5%; inflation is not expected to slow to below an annualized 3% by the end of this year.

It's not only the UK and US where the kulaks are in the spotlight. Even in rich and stable Singapore Prime Minister Lawrence Wong has warned that "we have seen what happens in other countries when the broad middle falls behind...the centre does not hold. Societies begin to fracture and collapse."

It's still unclear where the US economy is headed in the near term. At the recent Jackson Hole central bankers' summit the Federal Reserve chairman Jerome Powell gave a clear signal that the Fed was preparing to cut interest rates, perhaps as soon as September. Any cut will weaken the US Dollar, which has already dropped by around 3% in August. A weaker Dollar can lead to higher import prices - as well as helping gold to a higher valuation, as it has done in August - and thus stir inflation. Whether British or American, the future remains fraught. Kulaks everywhere need to stay alert. Gold, up by more than 20% in Dollar terms since the start of the year, is a standout asset for the year so far.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.