All change - maybe

A fresh Middle East war is imminent.

The 800-plus ships stuck in the Strait of Hormuz for the past 12 weeks are now plagued with barnacles and may be unable to sail as a result. It's thought that around 20,000 sailors are still aboard; their physical and psychological health is also a concern. But it's the barnacles that will cost - hull damage, fuel bills up by as much as 40%, and even higher bills if dry docking & cleansing are necessary.

"Trivial" I hear. Maybe. But these costs come on top of many more from the real war. Which will be a challenge to Kevin Warsh, now with his own desk in Constitution Avenue, as chairman of the US Federal Reserve. By November this year Kevin will be facing a tide of price rises. He will have to decide if he wants to please President Trump and keep interest rates low or do 'the right thing' and push rates higher.

Bread and circuses

In ancient Rome the poet Juvenal created the term 'bread and circuses' to describe how a government can keep its people from rioting. Give them bread (cheap food) and circuses (mass entertainments to occupy their leisure time).

In the UK , where the overall economy is far weaker than that of the US, the government is now embarked on its bread and circuses gambit. Producer price inflation in April hit 7.7% - an alarming blow and one that should outweigh the attention paid to the country's Consumer Price Index (CPI), which was 2.8%. What the producer price tells us is that the underlying pressures are accelerating. The Bank of England (BoE) will be raising interest rates before the winter sets in.

So to placate the growing restlessness of the voter the British government has announced the "Great British Summer Savings Scheme". This circus will see free bus travel during August for children aged 5 to 15. Value added tax (VAT) will be cut from 20% to 5% on supposed 'entertainments (such as zoos and museums) during the summer holidays.

As for the bread, the government will reduce the 'agrifood' tariffs, making the prices for 100 products (including baked beans and tomato ketchup) lower. As the UK allows almost 90% of its food imports to enter duty-free this will benefit consumers by about £150 million a year, a fraction of the £40 billion the British spend on groceries. The government seems to have stepped back from its idea of exhorting retailers to have a voluntary price cap on essential goods.

All of which may help distract the voter's attention from a much more serious looming crisis.

Running out of money

Britain's left-wing government gained office in the July 2024 general election, promising among other things that it would get the economy growing again, fast. So far that hasn't happened. It also promised fiscal responsibility, which included making sure that day-to-day spending on health, defense, welfare and so on would be met by tax revenues - borrowing would only be for capital projects such as infrastructure.

The UK spends more than 8% of public spending on interest payments. About a quarter of the national debt is tied to the Retail Prices Index - when inflation rises, the interest payments do too. The last time the government had a budget surplus (taxes higher than spending) was in 2000. Last year the budget deficit was £153 billion, more than 5% of the country's total output.

Britain's last debt crisis in 1976 saw the country bailed out by the IMF (International Monetary Fund). The IMF doesn't have enough money to do it again.

The US national debt is racing to $40 trillion. In the last fiscal year (to March) the UK borrowed £132 billion, £110 billion of which went on interest payments. Last years the US borrowed $2 trillion, half of which was used to pay interest. This kind of absurdity cannot last.

Where does that leave gold?

Gold is down by almost 12% over the last three months but 36% higher than this time last year. Both the UK and the US control their own currencies and as we get closer to a serious debt crisis one simple trick will be - print more money. That will see inflation rip and many previously 'safe' places thrown into confusion.

Gold has trod water for 12 weeks not because of barnacles but because the expectation is that interest rates are going to climb. The yield of paper assets will rise, and gold has no yield. That's not why we use it. Gold is security, the only reliable form of money when fiat money loses its point. With the price in a pause period, it's surely time to take advantage.