Last week, we took a look at the history of gold as a unit of currency and a base value supporting cash money. Today, we want to take a closer look at the way that the value of gold reacts in the ups and downs of a modern economy.
As previously mentioned, the value of everything is determined by supply and demand. This applies for gold just as much as anything else. One of the major differences, though, is the fact that gold has a fairly fixed supply.
We say fairly fixed, because there are still booms and deficits. For example, during the 1600’s, gold saw a major fluctuation in value. Spanish Conquistadores were coming home from the new world with shiploads of gold. The rapid influx of gold into the market meant that gold quickly depreciated because there was greater supply. The Spanish monarchy found that they were in a bit of a catch-22, because while they worked to acquire gold that paid for their wars, the increase of gold supply meant that gold was no longer worth quite as much.
That being said, gold does have a relatively fixed level of supply nowadays compared to the amount that’s already out there on the market. This, of course, is why the gold standard was used to balance world currencies in centuries past. Today, the value of gold is instead determined largely by demand (rather than supply).
Gold Demand Rises In the Face of Financial Insecurity
A huge illustration of gold’s ability to keep its value when other forms of investment–like stocks and bonds–plummet was the recent market fluctuation set off by Brexit. While the British Pound saw its lowest point in the last 30 years, gold prices soared, reaching their highest point since the stock market crisis of 2008. In fact, some retailers of gold and bullion were actually drained of their stores.
This isn’t the first time that we’ve seen the price of gold move opposite other investments. During the 80’s, a scare about inflation rates caused many investors to run for gold. However, with the gradual financial climb afterwards, the value of gold dropped and stabilized, staying at about the same rate until 2008.
Gold as a Safe Haven Investment
Gold (as well as silver and other bullion) has established a place for itself as a safe haven investment for a few reasons:
- It’s a tangible currency whose value stays largely the same throughout time.
- It’s a currency that can be used independently of governmental backing.
- It moves out of sync with other investments.
When stock market values plummet, gold prices spike, and when the stock market gradually grows, gold prices re-stabilize. For this reason, many people like gold as a step in diversifying their portfolio to insure against losses during declines in the stock market.
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