Why Gold goes up in value when there is a Financial Crisis

Gold is a real, tangible asset. Many of the world’s central banks retain a supply of gold bullion as a form of security against fluctuations in the value of monetary currencies. In recent years most central banks have reduced the ratio of cash to gold. Nevertheless, gold is still held. The strength of any currency is based on the confidence of investors. The US dollar has retained a great deal of strength simply because the US economy is huge. When there is a financial crisis, confidence in the dollar falls and investors switch their investment from cash to gold. 

Gold has traditionally been the backbone of many of the world’s financial systems. Some years ago, bank notes would carry a promise to pay the value of the note in gold. This practice, like the gold standard has fallen away. The world’s central banks no longer back their currencies with gold. Gold has therefore lost some of its appeal in the world’s economies. 

Unlike money, gold has an intrinsic value. An ounce of gold will always be an ounce of gold. A number national and global events have acted as triggers for people to buy gold. Gold is real, it is tangible and it will have a value even if all of the world’s currencies collapse. 

A financial crisis can place huge pressure on the value of a currency. Many investors and traders hold reserves of US dollars, perhaps British pounds and the Euro during times of confidence. These provide for a great deal of liquidity and may be used instantly to facilitate trading across the globe. But a financial crisis can place a huge amount of downward pressure on these currencies as investors lose confidence in a shaky economy. When a trillion dollars has been lost to the globe, the currency itself can be placed at risk. 

Uncertainty is behind the rush to buy gold. With the US and European economies at risk the currencies could turn out to be volatile. If there are signs that the economy is in real trouble, there is a danger of the value of the currency depreciating rapidly. Even a small risk of financial crisis may therefore be enough to drive investors to the safe and relatively stable gold. 

A falling currency can lead towards hyper inflation and financial instability. Against such a backdrop, gold will retain a real value. 

The price of gold is market driven. Prices are determined by a process of supply and demand. If the supply is constant, an increase in demand will lead to a higher gold price. When economies are at risk or when the world is plagued by war, many people seek out a safe have that lies in gold. The more volatile the situation, the more people are driven to buy gold. The demand for gold soars and the price rises. 

It is a cycle that will continue as long as we use money as a means of exchange.