It’s really interesting to look at a graph of the gold prices of the last fifty years beside a graph of the stability of the economy of the past fifty years. If you could transpose one onto the other and leave the timelines the same, you might notice that they are exactly opposite. When the economy dips, the gold price rises. When the gold price dips, the economic stability rises.
The interesting thing about all this is that it is actually due in large part to psychology and human nature, rather than a complex set of mathematical data. Basically, a lot of the changes in the price of gold are due to the insecurity and fear of people. Curious? Here’s how this works.
Okay, the whole price of gold is affected mainly by supply and demand. This is something you probably learned back in high school. When supply is high and demand is low, the price of a commodity is at its lowest. When supply is low and demand is high, a commodity’s price is at its highest point.
Gold, as a commodity, is affected by the exact same phenomenon. However, demand factors much more into the fluctuations in the price than supply does. The supply of gold over the past several decades has been pretty steady. There haven’t been any major gold rushes, but mining stays about steady. Once in a while, a government will start selling a lot of gold out of its vaults, driving the price lower, but this doesn’t happen very often at all. Since supply is pretty steady, demand is what drives the dramatic changes in the value of gold.
One of the things that drives demand, interestingly enough, is insecurity. Since time out of mind, gold has been seen as a form of financial security. Precious metals are associated with the rich, and people think they have inherent value as money. The truth is that there is no inherent value in precious metals. It’s just that people want them and will pay for them, effectively giving them a value.
Since people always want precious metals, though, and since they always expect to pay for them, they will always have a high price. This means that over time, gold holds its value very well. It also means that people see it as a solid, steady investment when all other investments are failing.
Therefore, when the economy starts to collapse and people begin to lose money in stocks and other investments, they rush out to purchase gold and other precious metals, thinking that these things are safer. Since more people are buying precious metals, their prices rise, reinforcing the idea that they are safer in times of economic trouble.
This is really a case of a chicken and an egg. Is gold a good investment for economically troubled times because people are insecure during those times, or does the insecurity drive the investment and thus the price of gold? Either way, you can be sure that during times of economic trouble, gold investments that you already have stored up will be worth more than ever.