How Does Gold Affect the Economy?

Most investors know that the economy affects the price of gold. It is almost an undisputable fact, however there is another side to it, gold has an influence on economies and various dynamics rise and fall. Learning more about these dynamics and how gold has an impact can help people who have gold in their investment portfolios to make smarter decisions. 

First things first, we need to understand the power that gold has in terms of inflation, price points and other investment options. 

Gold has been part of the world economy for centuries. It influences the global trade and economic growth of nations across the globe. The status of gold has not changed much in the last 4000 years. It is still a status symbol.

Around 500 BC, countries were minting their own gold coins and used these to trade. The use of gold as currency continued to 1930 when there was a worldwide depression separated the idea of gold as a commodity from other forms of money. Before then the value of gold was measured according to the value of the dollar but in 1971, the United States finally opened the international exchange rate that is being used to this day.

Even though gold no longer functions as currency it is a commodity that is tradeable. It has retained its lustre and its allure over the years and is still a sought after commodity by investors. How does gold affect the economy.

Gold reflects the general health of the economy. Gold buyers pay more for gold when the economy is unstable. The gold price is a direct reflection of what professional traders think about the direction and health of the economy. When the economy is low or inflation is high, people turn to gold. Those who have invested will take advantage of the high prices by liquidating their gold investment and gold buyers buy more because of the ensuing rise in the demand for the precious metal. When investors believe that the economy is failing, they rush to buy as much gold as they can. This pushes the price up. 

The price of gold is affected by instability. Wars, political unrest, pandemics and more drive the price of gold high. When these happen, many investors forgo the traditional investment instruments and put money into safe havens like gold. The effect of this is that the price of stocks and bonds will fall even when there are no actual political forces pushing the move to gold. Jittery traders and investors affect the economy by dropping other investments and choosing gold for its stability. 

Some good examples of this happening include: 

  • When the U.s President, Richard Nixon scrapped the “Gold Standard” in 1971, the value of gold doubled in one day.
  • During the EuroZone crisis gold skyrocketed to $1,900 on the 2nd of September 2011.
  • When Britain announced that it was exiting the European Union in 2016, the price of gold went up by $100/oz. in just six hours.
  • With the COVID-19 spreading in 2020, the price of gold leapt to over $2000/oz. on the 7th August 2020. 

Throughout history, the correlation of the gold price rising when the economy is bad and the currency is threatened has been repeated in many incidents.

While the rising price of gold is an indicator of an unhealthy economy, it also drives completion which in turn drives economic growth. Countries will take steps to adjust the factors and conditions for economic growth, the price of gold will be adjusted as well.  History has shown that when all these factors that drive the price of gold high have played out, the market will self-correct in time. This is why it’s important to sell your gold as soon as you see the price rising to incredible highs because the price will come back down as the other economic factors are corrected, inflation drops and the current stabilizes.