Gold Back to £4,000. How Quickly Could It Happen?

Gold has already traded above £4,000 an ounce in sterling. Getting back there from around £3,000 would take a one-third rally. With inflation rising again, Britain’s debt past £3 trillion and Gulf oil supplies still exposed, we believe the next sustained move is more likely to be up.

By Matthew Jones

The last thousand pounds looks like a long climb. It can look a lot shorter once the market starts moving.

On 3 November, GOLD.co.uk quoted gold at £3,015.77 an ounce and showed an all-time spot high of £4,024.52. From that quote, £4,000 is about 33% higher. That’s a substantial move. It’s also a level buyers have already paid. What would make them pay it again?

How quickly can gold move?

In January this year, gold gained 12.3% in sterling in a single month, using the World Gold Council’s London benchmark series. Two months at that pace would take £3,000 to about £3,780. A further 6% would put it around £4,000. That’s how a climb of nearly £1,000 could happen over a few months if investors start repricing risk as quickly as they did in January.

Gold gained 20.8% in sterling over 2020, reaching a record during the pandemic. The sterling record set in 2011 took until 2019 to break. Gold has repeatedly recovered old highs and set new ones, and the wait has varied enormously. The case for a quicker recovery today comes down to what could change investors’ minds in the next few months.

Inflation is picking up again

UK inflation rose from 3.1% in August to 3.5% in September, with motor fuels making the largest upward contribution to the change. Brent was still above $100 a barrel on 3 November. Emergency reserves and pipeline diversions have helped keep oil moving, but the International Energy Agency still sees a tight market, particularly for diesel. The longer that lasts, the more it costs to move goods and run businesses.

A basket that cost £100 in September 2021 cost about £128 in September 2026. Turn that around and today’s £100 buys what roughly £78 bought five years ago. Even if inflation slows again, those price rises are already in the household budget.

Britain has crossed £3 trillion in debt

Britain’s economy grew 0.7% in the three months to August. The risk from here is that high energy costs squeeze households and businesses hard enough to slow growth while inflation remains above target. The Bank of England would then face an awkward choice. Keep rates high and add pressure to borrowers, or ease policy while inflation is still elevated and risk further pressure on sterling.

That choice gets harder when you look at the size of the debt. Britain’s public sector net debt passed £3 trillion for the first time in September, according to provisional ONS figures. It first passed £2 trillion in June 2020. That’s another trillion pounds in just over six years. At 94% of GDP, the ratio was slightly lower than a year earlier and still around levels last seen in the early 1960s.

The pressure builds as older, cheaper debt matures and has to be refinanced. If borrowing costs stay high while growth weakens, rising interest bills can leave the government with less room to support the economy. Higher real yields can weigh on gold in the meantime. The bullish case strengthens if growth falters and rates come down while inflation stays stubborn. If sterling weakens too, gold can cover some of the distance back to £4,000 through the exchange rate alone.

The arithmetic is straightforward. A 20% rise in the international gold price in dollars, combined with a 10% fall in sterling against the dollar, would take £3,000 to £4,000. Neither move has to do the whole job.

Who’s buying while the price is down?

Central banks and other official institutions added a net 321 tonnes in the third quarter, up 42% from a year earlier. Physically backed gold funds added another 211 tonnes, while global bar and coin demand fell 19% year on year. A recovery can get moving before retail buyers return in force.

There’s a reason gold is still well below its high. In September, rising US Treasury yields and a stronger dollar helped drive gold lower even as money flowed into gold funds. Another oil shock could initially push yields higher if investors expect tighter policy. The stronger setup for gold comes if growth weakens and the return on cash and bonds after inflation starts to fall.

The geopolitical trigger could come quickly. Brent dipped on the prospect of talks even as recent attacks kept supply concerns alive. A fresh threat to Gulf shipping could bring those risks back into prices just as quickly. For sterling gold, a weaker pound or falling real yields could add to the move.

Why we think a floor is forming

Our view at Britannia Bullion is that gold is building a floor around current sterling levels and the balance of risk now favours a move higher. We expect dips and pullbacks along the way. A sustained break lower alongside rising real yields and a stronger pound would make us revisit that call.

Inflation is picking up, energy supplies remain vulnerable and Britain has crossed £3 trillion in debt. If growth falters, policymakers will have to weigh the cost of keeping rates high against the risk of easing while inflation is still above target. Meanwhile, central banks are adding to gold reserves through the volatility. If markets start pricing weaker growth and a weaker pound together, £4,000 could come back into view in months. January showed how quickly the first leg can happen.

About the author
Matthew Jones is co-founder and Precious Metals Analyst at Britannia Bullion and a contributor to Kitco. https://www.kitco.com/author/matthew-jones