how gold prices reacted to major economic events

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Gold has been a safe-haven asset for investors during crises, due to its ability to maintain value over time and act as a hedge against inflation and economic uncertainty. During previous crises, such as the 2008 financial crisis and the 2020 pandemic, gold prices rose as investors sought alternative investments to stabilize their finances. Investing in gold can take many forms, including physical gold, gold ETFs, and stocks of gold mining companies, each with their advantages and disadvantages. While gold has historically maintained its value, it does not provide income and can have high storage costs.

how gold prices reacted to major economic events

Economists are well aware that gold has been a safe-haven asset for investors during the crisis. In this article, we will look at the dynamics of gold prices during global crises, examine the reasons for fluctuations in gold prices and briefly analyze whether it is worth investing in it in today’s uncertain times.

Gold has been a store of capital for thousands of years and will likely continue to be so in the future. Unlike paper currency, which can eventually lose value due to inflation or political instability, gold is a tangible asset that can be held and stored for generations.
Investing in gold can take many forms, including physical gold (such as gold coins or bars), gold exchange-traded funds (ETFs), and stocks of gold mining companies. Each type of investment has its advantages and disadvantages.

The first notable crisis that led to a significant rise in gold prices was the oil crisis of the 1970s. During this time, the price of gold skyrocketed as investors turned to the precious metal as a hedge against inflation caused by rising oil prices. This crisis started a long-term trend of rising gold prices during periods of economic turmoil.

Gold index from 1972 to 1980

The 1980s saw a period of relative stability, but the 1990s saw a series of crises, including the Gulf War, the Asian financial crisis, and the Russian debt default, all of which sent gold prices soaring.

The 2000s saw another period of relative stability and gold prices remained flat until the 2008 financial crisis. The financial crisis of 2008 became one of the significant economic events of the 21st century, causing large-scale disruptions in financial markets around the world. I wrote an article where I tell what was the cause of the crisis and who was able to make money from it. At this time, investors turned to alternative assets to hedge against market volatility and preserve their wealth. One such asset that attracted a lot of attention was gold.

Visualization of the crisis of 2008 using the example of the fall of the S&P500 and the gold index

In the early stages of the crisis, gold prices were relatively stable and hovered around $800 per ounce. However, as the crisis deepened and stock markets plummeted, gold prices began to rise. By the end of 2008, gold prices had reached a high of $1,000 per ounce, up 25% from the beginning of the year.

The sharp rise in gold prices during the crisis can be explained by several factors.

First, when stock markets around the world fell, investors looked for alternative investments that would provide a safe harbor from market volatility. Gold, with its long history of stability and durability, has become a natural choice for many investors.

Second, the crisis also raised concerns about inflation as central banks around the world poured trillions of dollars into their economies to stave off a total meltdown. Inflation reduces the purchasing power of fiat currencies, making gold a more attractive investment because it retains its value over time.

Ultimately, the crisis also led to a decline in the value of the US dollar, the world’s reserve currency. As the dollar weakened, investors turned to gold as a store of capital, leading to further increases in demand and prices.

Gold’s performance during the 2008 financial crisis underscores its role as a safe-haven asset during times of economic turmoil. While other assets such as stocks and bonds suffered significant losses, gold prices remained relatively stable and even rose.

In 2020, the pandemic caused another spike in gold prices as investors sought refuge from the uncertainty caused by the pandemic.

The behavior of the S&P500 and the gold index at the beginning of the pandemic

At the start of 2020, gold prices were trading around $1,500 per ounce, reflecting relatively stable market conditions. However, as the pandemic began to spread around the world, stock markets fell and economic activity ground to a halt. In response, central banks around the world implemented monetary policy aimed at stabilizing financial markets and stimulating economic growth.

As a result of these measures, interest rates fell to historic lows, and governments implemented large-scale fiscal stimulus packages. These policies have fueled fears of inflation, prompting investors to turn to gold as a hedge against a possible decline in the value of fiat currencies.

Gold prices responded accordingly, soaring to record highs of over $2,000 per ounce in August 2020. That represented a gain of nearly 30% year-to-date and the highest level gold has reached in nearly a decade.

The sharp rise in gold prices during the 2020 crisis can be explained by several factors. First, as mentioned earlier, fears of inflation stimulated demand for gold as a store of value. Second, the pandemic has created significant uncertainty, forcing investors to seek safe havens such as gold to protect their wealth.

Overall, gold’s performance during the 2020 crisis demonstrates its continued relevance as a safe-haven asset during times of economic uncertainty. Despite volatile market conditions, gold prices have remained relatively stable, reflecting its unique properties as a store of value and hedge against inflation.

Another reason gold prices rise during crises is that gold is a finite resource and its supply cannot be increased at will. As a result, when demand for gold increases during a crisis, its price tends to rise due to limited supply.

The chart above shows the cost of one ounce of gold and the inflation-adjusted yield on the 10-year US Treasury.

This correlation explains why inflation is gold’s best friend.

In a nutshell: the pros and cons of investing in gold.

Pros:

Long-term value: Gold has historically maintained its value over a long period of time, making it a solid investment option for those looking to preserve their wealth for the long term.

Inflation hedging: As mentioned earlier, gold is often used as an inflation hedge because its value tends to increase during periods of high inflation.

Active shelter: gold is considered a safe haven asset and investors often turn to it during periods of economic uncertainty or market volatility.

Cons:

Does not give income: Gold does not provide any income unlike stocks, bonds or real estate. This means that investors who invest exclusively in gold do not receive any income from their investment.

Lack of intrinsic value: Gold is a commodity, and its value largely depends on supply and demand. Unlike company stocks, whose intrinsic value is based on their earnings and future growth potential, the value of gold is largely subjective.

High storage costs: Gold is an asset and storage costs can be high, especially for large amounts of gold. If we are talking about physical acquisition.

Gold is a popular investment asset for several reasons, including its historical value, its ability to act as a hedge against inflation and economic uncertainty, and its usefulness as a tool for diversifying an investment portfolio.

The article was written by the editors of the “Economy in Pictures” channel, we publish economic digests and infographics entirely in Russian. We will be glad to see you in the channel if you want to receive new economic data in an accessible format.

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