During times of economic instability, investors naturally seek to find a way to minimize any potential losses and invest in assets that will hold their value. One such investment is gold, a traditionally popular choice during economic volatility for a number of factors.
Investors during these periods often look to diversify their portfolios away from the stock market which fluctuates with the economy and is therefore at risk of crippling losses of value, losing money for investors over years or even decades. Gold is an obvious choice for many investors because gold is not linked to the economy in the same way that stocks are. As gold has been used as currency across much of the world in the past, it is not tied to one particular government or economy, which causes it, in effect, to be a global, international form of currency. While it is not impervious to fluctuation, these changes aren’t linked to economies and therefore much less likely to lose investors’ money during a downturn.
Gold does not depreciate in value, partly due to the fact that it is not only an internationally recognised currency but also a commodity. Hence, during unstable periods, gold is a wise choice; stocks can fail but gold will not, or at least not to such a drastic extent. It will always be in demand, not least because large markets like the electronics industry and the jewellery market use it extensively.
For the reason that it acts as a hedge for inflation, gold is seen as a ‘safe’ investment. When stocks and bonds decline, it often follows that investments like gold, which have intrinsic value, actually increase in worth, and are therefore less likely to cause losses. When the economy is suffering from negative interest rates, a situation whereby inflation is higher than the nominal inflation rate, gold is often a sound investment. In these cases saving with a bank is often seen as more high-risk than owning a tangible asset.
Although investing in gold is not a completely sound method of avoiding economic instability and does not ensure fully a hedge against inflation, it does have a proven record of minimizing losses during these times. This is evidenced by the fact that gold held its value through the worst of the last century’s economic crises, the Great Depression and World War Two. This established testimony to gold’s ability to hold its worth is a significant aspect in the tradition of investing in gold during economic problems.