The yield on 10-year gold rose 0.27 percentage points on Friday to 3.77%, extending its weekly gain to more than half a percentage point. This week’s rise marks one of the biggest increases in long-term borrowing costs on record. Sterling fell below $1.11 on Friday for the first time since 1985, while the FTSE 100 fell 2.4%. Friday’s strong sell-off in gold and the pound came after Kwarteng, the chancellor, said the government would scrap the top rate of income tax of 45p, replacing it with a rate of 40p. He also announced a reduction in stamp duty on house sales. The tax cuts, which will reduce government revenue, come as the UK is expected to spend £150bn subsidizing energy costs for consumers and businesses. Kwarteng said the energy bailout would cost 60 billion pounds in the first six months. A large part of this borrowing will have to be financed by the sale of portfolios. The UK Debt Management Office has increased its planned bond sales for the 2022-23 financial year by £62.4bn to £193.9bn. “This massive fiscal event is a radical economic gamble. a ‘go big or go home’ bet that will put UK debt on shaky ground,” said Bethany Payne, bond portfolio manager at Janus Henderson Investors. Investors are also expecting more aggressive rate hikes from the Bank of England to offset the inflationary impact of Kwarteng’s stimulus measures, following a 0.5 percentage point increase in Bank Rate this week. Expectations of more aggressive BoE rate hikes pushed the two-year gold yield up more than 0.8 percentage points this week. After the chancellor’s announcement, markets celebrated with a 0.75 percentage point rise at each of the next three BoE meetings, taking interest rates to 4.5%. Adding to the pressure on UK government bonds, the BoE also announced on Thursday that next month it will start selling gold bullion it holds as a result of previous bond-buying programs in a bid to shrink its balance sheet. Payne said Friday’s lending announcements would make it even harder for investors to absorb the BoE’s gold sales, raising the possibility that so-called quantitative tightening is “over before it even starts.” The pound on Friday extended its recent slide, falling as much as 2.1 percent after Kwarteng’s speech to hit a low of $1.1022, a level last seen in 1985, according to Refinitiv data. Against the euro, the pound fell by 1.1%. “In this kind of environment with a cost of living crisis, an energy crisis . . . the potential for policy mistakes is increasing,” said Stephen Gallo, head of European FX at BMO Capital Markets. “The currency will show great weight and it does now.” The combination of the gold market rout and the fall in the pound – which would normally benefit from higher interest rates – sends a “worrying” signal that investor faith in UK economic policy could be slipping, said Mike Riddell, manager portfolio. at Allianz Global Investors. “To say the UK is becoming an emerging market is still clearly a step too far – there are still strong institutions. But it’s a slippery slope,” he added. “The risk is that if the market decides you’re going down the path of actually implementing the wrong policy — launching a massive fiscal stimulus when you’ve got double-digit inflation — you lose credibility that’s been built up over decades.” Additional reporting by Chris Flood
