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Gold in Uncertain Times

In the world of investments, gold is associated with inflation. It is the one investment asset that goes up in value when every other asset seems to be struggling. High inflation drives the price of gold high and because inflation goes up and down, it causes the gold price to swing up and down. Inflation is almost always affected by government and central bank policy errors that often result in the overstimulation of the economy whilst trying to either allows certain recoveries or create booms in certain sectors.

In the 70s the gold standard was abolished. This meant that the value of the U.S dollar and other major currencies would no longer be coupled with gold. What that happened the value of major currencies like the dollar would swing high or low based on the amount of paper money being printed. The problem is that when more paper currency is printed and put into circulation the strength of the currency is eroded and the chances of inflation rising increase.

The world looks to the U.S dollar as a base currency but gold became a barometer of the prevailing economy. People bought more gold in the 70 after the end of the gold standard not only because the inflation data was alarming then but because there was a growing perception that the governments of the day was not taking the right decisions to reign inflation in. people began to trust gold more to protect wealth against the cost of living rising uncontrollably.

Whilst the price of gold in Australia drifted for a couple of years and the 1980 peak, the 2008 global financial crisis and the policy mistakes that a lot of governments took were enough to push the price of gold to all time levels between 2000 and 2010. There was a fear that governments and central banks were not taking good decisions that would stimulate growth and stem the possible collapse of the major European currency in industrialized countries. In September of 2011, the price of gold peaked at $1,900 and then began a slow decline for a couple of years. A few more years later, pessimism over the world economy returned allowing the price of gold to rise again.

In the years leading up to 2020, the gold price doubled as Brexit and COVID-19 created high levels of uncertainty and volatility in the economy. In the summer of 2020, the price of gold hit record highs. It peaked at $ 2074/oz in August 2020 and the proceeded to level out in the months after that. To anyone looking at the gold price in the short term, the stability of the prices or the fact that it stood at $1,700 after bottoming out of the $2000 an ounce does not make gold look like a high return investment. However compared to where the price of gold was in 2015, the precious metal has managed to withstand a lot of negative sentiment since then.

As the global economy attempts to recover from the pandemic concerns are turning to Russia’s invasion of the Ukraine and how the war could further destabilize the global economy once again. That is not the only concern. A lot of industries are struggling to open up the bottlenecks in the supply chain of many materials caused by lockdowns and Brexit. These have put pressure on inflation and fear that most people would be unable to access credit or put their money in property or stocks and bonds. Rising inflation will make life harder but it will mean that this is once again the best time to look at the gold market closely.

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