What Happens to the Value of Gold During a Recession?
During a recession or when the market is experiencing a crash what happens to the value of Gold? During the last known recession, the asset which happened to perform the best on the markets was in fact the yellow metal. Looking at how Gold performed during the last financial crisis, could it be that the price of Gold rises as a result of turbulent market conditions? Our guide will explain how Gold has performed in the past and what makes this asset attractive to traders.
According to Forbes, the price of Gold rose from 65 in 2006 to 180 in 2011. So what is the main reason for a surge in prices?
Investor Fear Causes the Value of Gold to Surge
Traders will find Gold attractive during times when other financial assets could potentially cause more losses than profit. That’s not to say that Gold couldn’t also cause a loss, but the yellow metal could be viewed as a safety blanket at times when the market is seen to crash.
Gold prices normally reveal what the U.S. economic state is, as it is pegged against the U.S. Dollar. When prices are high, it tends to indicate that the country’s economy isn’t healthy. Therefore, traders will buy the precious metal as a form of protection against a potential economic crisis or also inflation.
The Value of Gold Throughout History
The Great Depression
In 1929, the world faced an economic downturn which we now know as the Great Depression. This slump lasted for ten years and was the most severe economic depression as it impacted global markets. The stock market crash is what caused the depression and shattered the American economy, which in turn caused poor consumer confidence and caused unemployment levels to sharply rise. During this period, the price of gold skyrocketed from $20.67 to $35 an ounce. The reason for this sharp rise in prices was down to people trying to buy Gold as a form of protection against the collapse of the stock market. This eventually led to the Gold Reserve Act which sparked the economy up once again in the U.S. as it required people to exchange physical amounts of Gold to paper money.
Detaching the U.S. Dollar from the Gold Standard
In 1971, Gold prices shot up from $42 to $120 an ounce when President Nixon detached the U.S. dollar from the gold standard. This meant that the central banks around the world could no longer exchange their currencies for U.S. Gold. The purpose behind this was to decrease the value of the U.S. Dollar against the yellow metal.
2008 Financial Crisis
The world was facing yet another recession, and at the wake of it, the price of gold was trading at its all-time high. The precious metal was trading at $1,032 at the start of 2009.
How Can I Start Trading Gold with Eightcap?
You can start trading Gold CFDs today. CFDs are a leveraged product, and you will need to deposit a small amount of the overall value of the trade. This is known as a margin requirement. This way, you don’t have to own the underlying asset, but you can speculate on rising and falling prices. Even though profits can be magnified, it is important to note that losses can also exceed deposits.
Trading on margin is high risk.