Historical times of economic crisis like the recession of 2008, the Great Depression, and other financial events remind us that the United States, and indeed the global economy is always vulnerable. This potential looming threat drives many savvy investors to look for ways to hedge or potentially insulate themselves against a future economic crisis.
A Historical Perspective On The Economic Impact Of Gold
The history of gold’s value is well known among economists as well as the general public. Precious metals like gold, silver, and platinum tend to be a safe-play investment during times of economic uncertainty. This is largely related to the fact that precious metals have an important characteristic that provides them with superior trade stability.
This includes the fact that they are rare in nature while also possessing functional properties in a variety of industries. Unlike cryptocurrencies like Bitcoin and Ethereum, they are tangible, meaning you can hold them in your own two hands.
Yet precious metals do have a few limitations. Some investment specialists note that limited quantities of gold and silver tend to stifle liquidity. In certain economic conditions, they can potentially create a trade environment where only a limited number of individuals have the available currency to trade in precious metals. However, many investors also discount this logic.
Gold In A Liquidity Crisis
In the past, paper currencies that were backed by physical assets like gold or used precious metals as a physical currency remained stable. This meant that for centuries liquidity was rarely an issue, and if a time of economic crisis did strike, it was often short-lived. Historically, the last liquidity crisis in 1914, was the same year the Federal Reserve started operating and it was also the same year that World War One started.
This particular economic crisis was largely seen as a fabrication put on by the central banks. At that time the central banks of Germany, France, and England also started to influence to disrupt currency as well as gold flows, which further sparked a global economic panic.
Ultimately, when gold and other precious metals are tied to a currency the price tends to remain relatively stable. At the start of the 1914 liquidity crisis the price of gold was sitting around $20 per ounce and it had maintained that relative value for several decades before. The cost of living was also different from today in that the average cost of a house was around $3,500, which equated to 175 ounces of gold.
Gold In The Hyperinflationary Crisis
Another historical scenario that bears looking at closer is the Hyperinflationary Crisis in the Weimar Republic era in Germany. At that time, gold and the national currency had become disjointed from each other. Gold’s price per ounce went from 170 Marks to an astonishing 87 Trillion Marks in less than five years! In this strange scenario, gold’s value in Germany had increased at nearly double the rate of inflation. This meant that gold could not keep up with the rapidly devaluing Mark, which caused its value to steadily increase.
These two, very different scenarios highlight a common argument against gold in that it is not technically an efficient investment for creating wealth. Yet it does an excellent job at protecting your buying power. Yet in the Weimar Hyperinflationary Crisis shows, it was not always the case. In a prolonged economic crisis, individuals who hold gold can indeed profit.
Gold In The Great Depression
Another historical case study to examine is the impact of government interference in gold markets during a significant trade crisis. As the Great Depression in the United States started to worsen, investors started taking a very aggressive stance toward investing in gold and silver to help hedge against the crashing values of other assets. To strategically address this President Roosevelt outlawed the private ownership of gold bullion. This highly controversial degree set the price of gold at $35 per ounce.
By the time we get to the recession of 2008, the United States and indeed much of the civilized world had completely abandoned the gold standard. Yet we still saw a very similar collapse in credit as well as equities just like we saw during the early days of the Great Depression.
It’s also worth noting that there is no gold standard to force the Federal Reserve to raise interest rates. Yet they still have the ability to do so. What this means if another economic crisis strikes, is still unclear.
With the Great Depression, the central banks were the core institutions responsible for exacerbating the problem. At that time the central banks didn’t follow the classical gold standard exchange on an international level. Instead, they attempted to establish a global basket exchange system that used multiple forms of currency as well as gold for a system that they described as the Gold Exchange Standard.
Ultimately the gold prohibition of the Great Depression yielded mixed results. On face value, it did very little to keep the Great Depression from escalating. In a certain light, it also damaged the strength of trade and savings. At the same time, black markets started dealing that were dealing in precious metals become increasingly popular.
The Economic Crisis Of 2008
When it comes to the economic crisis and recession of 2008, the gold markets doubled in value as the stock markets threatened to crash. While many economists predicted that gold would collapse to its pre-crash levels, we have not seen it happen yet. Indeed, Gold remains one of the most effective and consistent investment performers.
Going forward, it’s a little hard to predict what we will see if and when another financial crisis strikes. Most likely we would see a massive fiat stimulus by multiple governments to artificially support the deflationary fiscal system. It’s also highly likely that we would see the central bank intervene to some degree, which could lead to a flight from hard assets like gold. Yet even if interest rates continued to raise the potential for a spike in the dollar index could be in steep decline This would most certainly prompting investors to gradually turn to precious metals including platinum, silver, and the safest bet of them all, gold.