A financial crisis is an ever-present threat in any economy and nobody knows for sure how to predict them. When an economy falls into catastrophe, most investors end up biting the bullet and losing huge amounts of money on their stock assets. However, while the value of money and stocks drop, gold prices tend to go up during times of hardships.
Whether you are the CEO of a company or an independent venture capitalist, investing in gold is a lifesaver strategy that can keep your finances afloat, even during the worst economic collapse. Don’t believe it?
Here we will discuss four major financial crashes that have happened in the last 30 years and how investors used gold to stay afloat and weather the storm.
The Crash of 1987
The 1987 stock market crash, known as Black Monday, is a textbook example of this phenomenon. When the financial institutions’ over-reliance on computer trading programs weakened the market, stock prices plummeted by 22% in a single day and by the end of the year, they had fallen as much as 38.9%. At the same time, the price of gold rose by more than 20% as people desperately sought the security that only gold can provide.
As the economy slows down to a halt, so does the demand for products and commodities. Less demand means that stocks lose value, as people are less inclined to buy shares that don’t produce any profit. On the other hand, the value of gold tends to go up as stocks go down since its value doesn’t depend on stocks or other investments.
Gold allows you to lessen, or even eliminate, the blow caused by a financial crisis since its correlation with stocks is removed during a recession. This makes it very attractive for investors and as the demand for gold grows so does its price. By investing in gold you can have the edge the next time the stock market crashes.
1990 Kuwait Crisis
The economic crisis provoked by Saddam Hussein’s 1990 invasion of Kuwait is a good example of the resilience of gold to international events. The invasion opened up the possibility of a war in the oil-rich area. During the next 7 months, oil prices skyrocketed as the Iraqi sabotage of the oil wells and the coalition’s military campaign diminished both production and sales. This caused stocks to fall nearly 22.5%, while investors hurried to buy gold, causing it to rise by more than 7.5%.
Although speculation about the war and the impact of the Iraqi sabotage of the oil wells damaged the value of the dollar, gold benefited from the decreased confidence in the currency. Buyers understood that the effects of the conflict would be temporary, so by buying gold they expected to be able to buy dollars with gold in the future after the crisis had passed.
Gold has been called a crisis commodity for its ability to maintain and even increase its value during times of geopolitical uncertainty. International crises and wars have a negative effect on the market, as people are less inclined to invest when world tensions are high. As a result, gold becomes a magnet for buyers because it offers relative safety from inflation, price fluctuations, and doesn’t depend on the value of any currency.
The Dotcom Crash
In the early 2000s, the internet was an expanding market full of opportunities for investors. Driven by unrealistic expectations, venture capitalists rushed to buy stock in any online business that they could find, creating a huge surge in the price of stocks which never lived up to the expectation.
For many investors, online stocks represented their main asset so when the bubble crashed they lost everything. Stocks lost more than 27% of their value while gold made a small gain of 1%.
The Dot-com crash of 2001 exemplifies the dangers of depending too much on stocks without having gold as a safety measure. The companies that came out of the crisis better were those that had invested in different assets, instead of putting all of their eggs in one basket.
Gold acts as an investment insurance, providing safety to your assets portfolio. It is particularly useful in this role since it provides a safety measure in the case when the market crashes and the price of stocks suddenly declines.
The Great Recession of 2008
During the Great Recession of 2008, the value of the dollar fell in relation to other currencies, prompting thousands of investors to change their dollars for gold. While stocks fell as much as 39%, gold experienced a moderate down too, but still outperformed the stocks with a 5% gain at the end of the year. Companies that depended on dollars or credit suffered heavily, with several banks and investment institutions falling one after the other.
Although many stocks, such as oil shares, are dependent on the value of the dollar, the value of gold is independent of any currency and is only dictated by the natural laws of supply and demand. In fact, gold was used for many years as a backup for currencies.
Most countries have abandoned it, but gold is still stored by many central banks in case a currency crisis erupts which devalues their money supply. Since gold doesn’t devalue with any currency, its owner enjoys protection from the most serious effects of an economic crisis or sharp rise in inflation.
Buying gold is one of the best ways that you can safeguard your investments during times of crisis or recession. Gold has been used for thousands of years as a currency and even today it is recognized all over the world as the most basic form of money.
Adding gold to your investment portfolio will give you an edge during hard times, as endless recessions, wars, and busted economic bubbles prove that gold is the asset that everybody is looking to buy when the going gets tough. Are you going to invest in gold now or wait until it’s too late?
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