The Effects of a Stock Market Collapse on Gold

Recessions can be emotionally trying events for investors. The most recent one which happened to be brutal occurred between 2007 and 2008. During this time, the S&P 500 Index went down by 37 percent. Now that the gold price is in a downturn again, how can you protect yourself?

Analysts Predicts a Slowdown?

Although a robust economic growth was noted in 2018, analysts warn of a looming slowdown. But will the price of gold suffer again? By 2020, an estimated GDP of 1.3 percent is expected. With the stimulus fading and interest rates becoming more apparent in the economy, the growth will slow to 2 percent this year 2019, and drop to 1.3 percent in 2020. This signals a significant recession risk.

Because a lot of investors hold gold to hedge in times of economic crisis, how well does it hold up in a stock market crisis? Understanding the effects of a market plunge on gold can help you make informed investment decisions should, a significant recession occur.

Should Investors Worry?

In the past, each time there has been gold bullishness, the yellow metal has struggled. The prices also mostly move down each time the dollar gains strength. Since January 2019, the dollar has been stronger than any other currency by 5 percent. It means that gold investors can expect the prices of the metal to fall. The risk of recession and an economic slowdown may boost the prices of gold to 1,400 dollars an ounce.

Why People Invest in Gold

Some people invest in gold as a direct investment, and others do so to hedge against a stock market crisis, a declining dollar, or inflation. The prices reflect the behavioral traits of commodity traders. Should they suspect a weak economy, they will invest in more gold. When the economy is suspected to be doing well, less gold is bought. Although stock market crashes can be easily predicted in hindsight, they are hard to notice when occurring.

A lot of people assume a decline should happen in a single day presenting a loss of 10 to 20 percent. With the economic uncertainties surrounding the stock market, investors are now turning to gold. During the 2008 crisis, stocks lost over 50 percent while gold gained 25 percent in value. Although most of them forgot about gold once stocks began to recover, savvy investors still hold on to gold. With the rise in demand, the flattening of mine production, and the economy preparing to get into a recession, gold will shine by the end of 2019. Anyone who understands that stocks will lose value will invest in gold to protect their retirement savings.

Investors are now at a better place than was the case before the 2008 financial crisis. Should the investment demand rise again like it did between 2009 and 2013, the same price response will be experienced. Gold is now reaching the market during a time when the central bank has become a metal buyer. The investment of the metal is now on the rise.

Leave a Reply

Back To Top