Every time the stock prices decrease, there is a significant rise in gold prices. This is commonly seen as a trend whenever investors want to take advantage of the situation. This may lead you to wonder about the relationship between traditional stocks and gold.
Investors have considered gold to be the most considerable buffer when there are significant changes in the market. Investors play it smart by hedging their investments using gold. This helps them protect against any potential risks. But when it comes to factuality, not much evidence outlines the relationship between the two.
Here we will look into the history of the relationship between stock and gold prices and understand the trends.
What Makes People Invest In Gold?
Gold has always been a subject of fascination for people in all cultures and all over history. People continue to invest in gold for a plethora of reasons. In the past, people would invest in gold, which was considered a symbol of wealth. They also considered gold a means of staying financially stable, among several other reasons. Gold is considered valuable for its intrinsic value; here are some of the reasons why people choose to invest in gold:
Hedges Against Inflation
The movements in the stock market don't affect gold. However, gold can be used as a hedge for inflation. Financial crises can cause significant market fluctuation, and investors use gold to stay as financially stable as possible. There are cases where the gold increases in value even if there is a significant stock drop.
High Demand and Strong Global Market
There is always a demand for gold in the world. One of the biggest reasons it is in great demand is its liquidity. Investors can buy and sell gold whenever they want. There is a high demand for it, so whenever investors want to sell, they always have someone to buy from them. Gold prices do not fluctuate quickly, and any news does not influence its price.
Low Maintenance
Most stocks require a lot of maintenance; in comparison, gold requires the least amount of maintenance. It does not matter if you invest in physical gold or ETF; you will not need to monitor your assets consistently. For instance, if you invest in real estate, you will have to ensure that you maintain its upkeep s the house is in good shape.
However, physical gold will remain in the same shape for years.
Stocks vs. Gold as an Investment
If you compare stocks and gold as investment opportunities, you need to compare them in the longer run. This is because stock investments will always come out on top if you consider short-term goals. However, those looking for a long-term and high-return investment opt for gold. They can map out over 50 years' worth of investment plans with gold investment.
Both the investment opportunities are equal, and there are no winners. Different investors have different goals, and those who wish to diversify can use gold and stocks as investments. But there are instances where gold can be considered a better move as it can set you up for a consistent investment.
Gold is not abundant, and the limitation makes it a better investment opportunity for growth. It gives investors the confidence they need to weather the tough financial times. The unpredictability of the market may push investors into investing in gold for wealth protection.
If investors invest all their wealth in the stock market and it drops, they may face a significant loss. This is why it is better to invest in gold, as it is a better strategy. If you want proof of gold's staying power, you can take a look at these historical instances:
The Great Depression (1929-1933)
One of the most prominent economic downfalls in modern history is the Great Depression. That downfall led to the highest unemployment rate in the United States, 25%. It began when the stock market crashed in 1929, and that impact pushed several investors over the bridge.
Consumer spending plummeted in every industry, and many investors were in great financial distress. In 1933, around 15 million people in America had no jobs and no hope for the future.
Initially, gold was a stable commodity, and in the later years of the Great Depression, the government increased the price significantly. The price rose from $21/oz to $35/oz. The prices were fixed, which made it difficult to track its performance. At that time, it was a better idea to invest in gold rather than get stuck in a pickle by investing in stocks.
The End of the Gold Standard (1971)
Every country has a gold standard. This is a system where a country backs its currency with all the gold it owns. This limits the country's ability to add more money to circulation as long as they don't increase their gold reserves. The gold standard has primarily increased a country's ability to overspend and keep economic inflation in check.
None of the countries currently use the Gold Standard; the United States also used the Gold Standard up until 1971. Now the United States uses the FIAT monetary system that does not need any assets to back the currency.
Up until 1980, the prices of gold increased significantly. But in 1999, the prices dropped as investors speculated that the central bank was decreasing its gold reserves.
The Financial Crisis of 2007-2008
After a housing bubble burst in 2007, which gave rise to a tremendous financial crisis, the housing market in the United States increased significantly between 1990 and 2007. The increase led to low mortgage standards, pushing the bubble to pop. That had a tremendous economic impact that decreased stock prices, and several Americans faced the consequences.
The Federal Reserve 2008 bailed out corporate banks such as Bear Stearns and Morgan Stanely. At that time, the price of Gold rose to $1,000/oz, but when the economic downfall hit Lehman Brothers, the prices went down to $775/oz.
Then in 2009, the price of gold stabilized. This volatility resulted from cash reserves needed to bail the banks out. The market in 2007-2008 was more willing to pay higher interest rates for the dollar loan than the gold loan. That was the reason for the drop in the prices.
The Different Forms of Gold Investments
Investing in gold is a suitable choice for all sorts of investors. It comes with stable prices and is easy to access. It can diversify your investments and help you save your wealth. But before you invest, you must be very careful. Investors who are new to the rodeo may end up putting their money in the wrong place. Here are some products you can try investing in:
Physical Gold (Coins, Bars, Etc.)
Physical gold is the first thing you may think of when investing in gold. This is one of the most common types of investment and can include options such as coins, bars, and even jewelry. There is no middle man in this type of investment; you can own the products directly. While they are great investments, they may not be as liquid as other forms of gold.
Gold Mining Stocks
Gold mining stocks are where you invest in the mining company and not the gold directly. This can be very profitable, but you need to complete proper research. This is why many beginners shy away from it.
Gold ETFs
Gold exchange-traded funds (ETFs) are an excellent option for those who do not want to invest in physical gold. It is very similar to stocks and gives you the advantage of not worrying about storage. This does not give you the ownership of the gold if that's what you are looking for.
When Should You Buy Gold?
Are you looking to buy gold to diversify your portfolio? This may not be the best time to invest, so you need to have a proper investment strategy. You can't just invest and wish to get rich overnight. That does not work. Instead, you need to help of an expert who can help you choose a strategy that fits your needs and goals. Gold is an excellent investment if you want to be stable with your investments.
Final Thoughts
In history, gold has always been a strong contender for investments. Even if the stock market fluctuates, the value of gold stays persistent. This can help investors save their wealth and get better investment outcomes.
You can learn more about gold investments with the help of our experts.
