Is Gold a favored safe haven in economically troubled times?

With the continuous spread of COVID-19, the global public health issue has become the issue of the financial crisis. There is a saying “buy gold in troubled times".Gold has always been an inflation hedge and an asset that is used to store value in times of uncertainty.

Gold was long popular as a medium of exchange and store of value, but due to the scarcity of gold, silver, and other metals have more assumed the means of payment in exchange. The gold standard implemented in the world with gold production increased during the 19th century.

The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.

After World War II, the Bretton Woods Agreement re-established the gold standard and pegged the US dollar to gold. All other currencies were fixed to the US dollar, the U.S. dollar became the global or world currency.

The price of gold has changed since the last century

Photo: GOLDHUB

Beginning in 1944, the Bretton Woods system played a major role in shaping the global economy in the post-war period. But a country on the gold standard cannot increase the amount of money in circulation without also increasing its gold reserves. People's recognition of currency does not come from the government, but from the gold support behind it. So, a crisis of confidence has arisen due to the output of gold that cannot keep up with the growth of the currency.

On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency. At the same time, many fixed currencies (such as the pound sterling) also became free-floating. From 1971 to 1973, as the dollar continued to depreciate, the price of gold increased threefold.

Gold price changes from 1971 to 1973

Photo: GOLDHUB

When the fourth Arab-Israeli war began in 1973, Arab Petroleum Exporting Countries proclaimed an oil embargo to express dissatisfaction on America's perceived partiality to Israel. By the end of the embargo in March 1974, the price of oil had risen nearly 400%, from US$3 per barrel to nearly $12 globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy. During the five months of the oil embargo, the gold price rose by about 50%.

The first oil crisis has inflicted a lot on the western countries and started to hoard oil. At the end of 1978, The Iranian revolution sparked the world’s second oil shock. Panic among crude oil buyers was an important driver of price. Buyers were concerned that the crisis would only get worse. Panic buying more than doubled the actual shortage and increased the inflation, gold prices had increased by about 200% over one year.

Gold price changes from 1971 to 1981

Photo: GOLDHUB

In the 1990s, the economy recovered rapidly, the yield on equity assets rose steadily, meanwhile, the gold was in the midst of a long-term bear market until the end of 1999.

After 2000, the sustained decline in the value of the US dollar due to a large deficit and the Federal Reserve lowers interest rates. The U.S. Dollar Index fell more than 30% from 2000 to 2007. With the dollar falling, gold increased more than twofold.

Photo: Internet

The United States subprime mortgage crisis occurred between 2007 and 2010, The Fed started Fed quantitative-easing scheme (release liquidity) to help rescue the economy of America. Fears of inflation and uncertainty about the economic outlook have turned to investment in gold. Gold prices rose from about $800 in 2007 to an 11-year high of $1,876.

Thus, the extremely rapid rise in inflation, or the expectation of an extremely high rate of inflation, will stimulate the price of gold in the short term. The gold enters the rising phase as the dollar begins to depreciate. The central bank's " release liquidity" will also push up the price of gold.

At present, the COVID-19 spreads around the world, and the deterioration of the trade environment and the geopolitical, etc. All these possible risk events are likely to make the gold price continue to rise.