When Gilts Go Bonkers and the Dutch Send Their Gold to London
There are weeks when capital markets behave sensibly, calmly processing the economic numbers and allowing everyone to get home in time for dinner - or, in my case, get back from holiday.
This wasn’t one of them.
As September gets underway, the UK gilt market has thrown another tantrum. Ten-year yields have climbed to around 5.25%, while the 30-year yield has reached approximately 5.89% - levels we haven’t seen since Tony Blair still had hair and the Spice Girls were considered a serious cultural contribution.
For those unfamiliar with the peculiar language of bonds, rising yields mean falling prices and higher government borrowing costs. Investors are effectively telling Westminster: “You can still borrow our money, but it’s going to cost you.”
And cost them it will.
The surge in yields has taken a substantial bite out of the government’s fiscal headroom, potentially reducing it by tens of billions of pounds. That leaves the new occupants of Number 10 facing an unpleasant choice ahead of the October Budget: cut spending, raise taxes, borrow more - or perform the usual political trick of pretending optimistic growth forecasts will eventually pay the bill.
Markets have heard that one before.
The reasons for the sell-off aren’t particularly mysterious. We have geopolitical uncertainty, another energy shock connected to Iran, stubborn British inflation and growing doubts about the credibility of the country’s public finances. Mix those together and you have precisely the sort of cocktail that gives bond investors a headache.
Higher oil and gas prices are especially troublesome for Britain. Energy costs feed into transport, manufacturing, food and household bills. That keeps inflation elevated and makes it more difficult for the Bank of England to cut interest rates as aggressively as politicians, mortgage holders and indebted businesses would like.
Consequently, markets price rates higher for longer and demand greater compensation for holding long-dated government debt.
This is where the bond vigilantes enter the story.
They never really disappeared; they merely sat quietly in the corner, waiting for governments to become sufficiently careless. When public spending rises, debt-interest costs balloon and inflation refuse to behave, they return and mark down the value of government bonds.
Politicians can ignore newspaper columns, opposition speeches and parliamentary committees. They cannot ignore the people expected to finance their deficits.
A rising gilt yield isn’t merely another number flashing on a Bloomberg screen. It affects the real economy. Mortgage rates remain higher, companies pay more to borrow, infrastructure becomes more expensive and an increasing share of tax revenue disappears into servicing yesterday’s debt.
The more money spent paying interest, the less remains for healthcare, defence, education or anything productive. Governments enjoy talking about “tough choices.” The bond market has a habit of making those choices for them.
Meanwhile, as Britain’s debt market made the country look like a slightly unreliable borrower, something interesting was happening beneath the streets of London.
The Dutch central bank, DNB sold approximately 59 tonnes of gold in New York and used the proceeds to buy an equivalent quantity of London-standard bullion. A further 27 tonnes was physically moved from North America to Zeist, while an equivalent quantity of market-compliant gold was transferred from Zeist to London. The operation left the total Dutch gold reserve unchanged but made substantially more of it immediately tradable through the London market.
That isn’t the sort of decision central banks make because someone fancied a change of scenery.
The official explanation cited geopolitical unrest, crisis preparedness and the need to make the gold more readily tradable. As this Old Man sees it, the Dutch want more of their emergency money somewhere it can be mobilised quickly if the world goes properly pear-shaped.
London remains one of the deepest and most liquid gold markets on earth. Bullion held there can be sold, swapped, or pledged as collateral with considerably less fuss than gold sitting thousands of miles away.
The Dutch handled the move sensibly. Part of their North American holding was sold and replaced with bars meeting London market standards. Another portion was physically transported through the Netherlands, avoiding the trouble and expense of melting and recasting the entire lot.
Following the move, London reportedly holds around 32% of Dutch gold reserves, up from approximately 18%. The domestic vault at Zeist retains about 31%, while the United States and Canada each hold roughly 18.5%.
The Netherlands still owns more than 600 tonnes of gold, so this isn’t a sale. It’s a rearrangement of the insurance policy.
And make no mistake: gold is insurance.
It doesn’t represent somebody else’s debt. It doesn’t require a government to keep its promises, a company to produce profits or a central bank to preserve its currency’s purchasing power. It simply sits there, saying very little - which is more than can be said for most politicians.
There is, of course, a delicious irony here.
Britain is being charged through the nose to borrow because investors are worried about inflation, political uncertainty and fiscal discipline. Yet the Dutch central bank has simultaneously decided that London is the right place to store a substantial portion of its ultimate crisis reserve.
On one side, the gilt market is questioning British economic management. On the other, a European central bank is expressing confidence in Britain’s financial plumbing.
Those positions aren’t as contradictory as they appear. Gold doesn’t care who occupies Number 10 or what fantasy figures appear in the next Budget. It cares about liquidity, legal certainty, secure storage and the ability to turn metal into usable money when markets become disorderly.
London still excels in those areas. Governments come and go, fiscal policies deteriorate and gilt yields wobble, but the City’s financial infrastructure has been built over centuries. That depth cannot easily be replicated by political decree or an EU committee.
The lessons are straightforward. Markets eventually charge governments for financial indiscipline. Central banks still regard gold as the ultimate non-sovereign insurance asset. And in a world of sanctions, wars and frozen reserves, where an asset is held can be almost as important as owning it.
For the rest of us, higher gilt yields mean greater pressure on mortgages, businesses and government finances. The Dutch gold transfer, meanwhile, is a quiet vote of confidence in London - even if it is hardly an endorsement of the government managing Britain’s books.
One story concerns the rising price of trusting governments. The other concerns where central banks place their trust when governments can no longer be entirely relied upon.
So, raise a glass - preferably before another tax is added to it - to the bond market for its usual lack of sentimentality. And give a respectful nod to the Dutch for reminding us that, despite all the talk of digital money, gold remains the asset serious institutions reach for when the geopolitical weather turns nasty.
The numbers may look dry, but the consequences are very real.
And every so often, even the gold decides it would feel safer in London.
(Except, of course, that little bit of gold that I have had squirreled away over the past 6 years and added to recently. That is staying where it is!)
As a final note: if you are interested in making money when gold changes location. Have a look at trademakers Gold+ investment program.
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