The stock market is one of the most important economic indicators in our country and around the world. It measures how well an economy is doing by looking at things like unemployment rates, inflation levels, GDP growth, etc. The Dow Jones Industrial Average was created back in 1896 as a way for investors to keep track of their investments. Since then, this index has become so popular that many people use it when they talk about stocks or invest in them.
However, there are some who believe that the Dow isn’t always accurate because it doesn’t take into account other factors such as inflation. In fact, if you look closely at the history books, you will see that the Dow dropped over 50% during the Great Depression. This means that even though we may not be experiencing another depression right now, the Dow could drop significantly from its current level.
If this were to happen, would anyone know where to turn to buy gold? Would everyone rush out to get more gold coins? Or would they just sit tight and wait until prices go up again? Let’s find out!
Article Overview
If the stock market crashes what happens to gold?
Gold is a great investment. It has been around for thousands of years and it will be here when we are long gone. The only thing that can take away your wealth faster than inflation, is an economic collapse or a stock market crash.
When this occurs you want to have some form of currency or asset that cannot lose value as fast as money does. This is why people buy gold coins and bars.
Unlike modern history gold has been a reliable investment for centuries. It is a form of currency that will not lose its value during times of financial turmoil. The stock market might crash, but gold will always have worth. So if you are looking to increase your wealth and protect yourself from the uncertainty of the economy, investing in gold can be a wise decision.
What happens to gold prices in a recession?
Generally speaking, the price of gold increases during periods of low economic growth, financial crisis, or recession. This is one reason why many investors seek to purchase gold as a safe haven asset when they are concerned about market instability.
The first reason why gold prices increase during a recession is quite intuitive: as people lose their jobs and fear future market conditions, they turn towards safe-haven assets like gold or silver.
This means that more people want to sell their stocks and purchase gold with the money. The result is an increase in demand, which leads the gold market to a higher price level.
For example, last year, we experienced the worst economic conditions since world war 2, with a 3.5% shrink of GDP growth across all sectors. In that period of time, the gold price hit an all-time high which is about $2,070/oz.
Another reason why gold price increases during recessions have to do with interest rates: as the central bank reduces the interest rate, people will seek alternative assets in order to generate returns.
A perfect example of this is the real estate market: if interest rates are low, people will try to obtain as many loans as possible and buy as many properties as they can. This is normal investor behavior.
As a result, the price of real estate increases. With gold prices having such a strong positive correlation with real estate prices, it is clear that an increase in interest rates will lead to lower gold prices by increasing the supply of real estate and decreasing the demand for gold.
Will silver go up if the stock market crashes?
Yes, like gold and most commodity prices, silver prices will definitely go up if the stock market crashes. Silver is a very volatile and speculative precious metal and is thus heavily traded on the commodities exchange.
This makes it subject to significant price swings when investors get in or out of silver positions. There may also be increased demand for this “poor man’s gold” as people panic into hard assets to have a grip on their purchasing power.
So silver prices will definitely go up with a stock market crash as it has such a strong positive correlation to the stock market as gold does. Hence making an investment decision considering this variety of factors keeping physical metal like silver in your investment portfolio gets you a great hedge against inflation.
What is the gold standard?
In economics, the gold standard refers to an international monetary system where all currency units are backed by a fixed amount of precious metal. “gold standard” is also known as a “fixed exchange rate”. In this sense, it can be contrasted with other forms of floating exchange rates such as the Bretton Woods system or the European Exchange Rate Mechanism.
In practice, however, there were several problems associated with the use of gold standards. For instance, the cost of producing gold for the largest gold producer was relatively stable compared to fiat currencies at the time. As a consequence, countries could print large amounts of paper money without incurring any additional costs.
Furthermore, governments had no incentive to maintain strict control over the quantity of money circulating within their borders because doing so would reduce the overall profitability of printing money.
How Did the Gold Standard Contribute to the Great Depression?
The gold standard contributed to the Great Depression. It made it hard for countries to return to the gold standard because they found it difficult or nearly impossible to do so. This led countries to keep interest rates high, which increased the value of the US dollar relative to other currencies.
As a result, demand for exports from countries whose currency was not as strong as that of the US dropped, causing them to suffer from the Great Depression.
It also limited their ability to correct the problem as they could not devalue their currency in order to encourage more exports and recover from the economic slowdown.
In this way, the gold standard limited the power of central banks and was one of many reasons why countries abandoned it during those times.
Should gold bulls worry about a market crash?
A market crash is simply a rapid decline in stock prices. One of the biggest crashes was the Black Monday Crash of 1987, where the Dow Jones dropped by over 20%.
The Dot-com Bubble, another biggest crash was started on December 5, 1995, and ended in 2001; and finally, the Great Recession where Lehman Brothers filed for bankruptcy and the Dow Jones dropped by -32.8% in a few months, from its peak on October 9, 2007, to March 6, 2009.
Many people believe that market crashes are bad news for gold bulls because people start selling their stocks and precious metals in order to purchase fiat currencies (Cash) that offer no yield; however, they do not consider that in a market crash, gold prices increase.
It is the same premise as to why people purchase stocks when the economy is booming. People seek companies to invest their money because they are being offered high returns on investments; however, when the economy slumps, they sell their shares at lower prices.
When this happens, stock prices drop but so do costs. In other words, companies offer lower dividends and people will have to save more money in order to cope with the inflation rate.
During economic distress, gold price and stock price show a negative correlation. This has to do with interest rates, as explained above.
What if the Stock Market Doesn’t Crash?
To say that the stock market will not crash is unreasonable. However, if the economic crisis is limited to only a few sectors, then there will be no reason for gold prices to increase. For instance, suppose an oil company gets affected by an economic downturn.
If this happens, investors might decide to sell their stocks in order to purchase gold or another precious metal that will offer them a good income.
However, if the economic uncertainty is widespread and affects almost all sectors of the economy, then it is unlikely gold prices will increase, as explained before. Again, suppose there is a general economic downturn due to debt issues.
If this happens, people might sell their stocks in order to purchase other assets; but if they are unsure of which asset to buy, they might decide to wait until things clear up.
As the financial crisis disappears, the stock market recovers and begins increasing its value normally. If this happens, people might find the stock market attractive again due to its high returns and start purchasing stocks considering that period as a better buying opportunity.
Final thought
The stock market crash of 1929 is probably the worst bear market in U.S. history, but there are still plenty of other markets that have experienced devastating drops over time.
If you’re concerned about what will happen to your investments when the next recession hits, it’s important to remember two things:
first, many financial planners believe we could be entering a period where stocks and bonds offer more stability than they did before 2008; second, if you own gold or silver for investment purposes chances are very good that even during a worst-case scenario your precious metals will retain some value because these assets are considered safe havens by many investors around the world. With all this being said, don’t think about selling any of your financial assets before you compare the potential return with the actual risk involved.
