In a crisis, gold is usually called a “safe haven”, implying its stability and reliability. How come gold earned the trust of so many people?
Three historical examples answer this question:
1. France, 1790s
At the end of the 18th century, in order to cover the huge budget costs, the French government issued paper money backed by the value of properties, namely assignats, that quickly underwent changes and were used as a means of payment. For a short period of time, courtesy of the paper money, it was possible to revive the country's economy, but an excessive emission of assignats soon resulted in inflation. In just three years (1790-1793), the assignats depreciated by 78%. At the same time, the prices of goods and services increased several times.
When the assignats plummeted, the price of gold skyrocketed. The best example that illustrates it: the French gold coin – the Louis d'or. By 1796, its price has risen by 288 times. Imagine how successfully the French survived the crisis, having the time to stock up on gold coins.
The chart illustrates the depreciation of the assignats in the period from 1789 to 1796.
2. USA, 1970s
The abolition of the gold standard system* in the United States in 1971 was one of the reasons for the tough economic situation. Stagflation emerged – a condition of stagnation or decline in production combined with relatively high unemployment and accompanied by inflation. Describing the situation of those years, President Ronald Reagan called the volatile mix – a misery index. Over the course of ten years, the misery index increased in parallel with the price of gold.
When the gold standard was adopted, the price was fixed by the government and could only grow concurrently with the dollar. Being no longer pegged to the national currency, the price of gold began to grow. As a result, within ten years of economic stagnation, the price of the noble metal increased 16 times.
The chart illustrates the price rally of gold along with a gradual increase of the misery index.
3. USA, 2008-2010
The mortgage crisis in the United States gave rise to an economic crisis. Many major banks closed down, the industrial growth slowed down, while unemployment reached a critical level. Americans were not the only ones who faced that problem which soon escalated to global proportions.
What happened to gold at that time? Fearing the collapse of the economic system, the Americans began buying up gold en masse. In 2009, the sales of gold coins broke all records, leading to a shortage of coins on the market. The whole thing had a positive effect on the price of gold. If in September 2008, an ounce of gold cost $750, then by the end of 2010 – already $1,400. Once again, the “safe haven” proved its benefits during a crisis.
The chart clearly demonstrates the rise of gold during the global crisis that began in 2008.
The economic shocks can be caused by various reasons, unfolding according to different scenarios. But there’s one common factor: the fragility of national currencies and the inability to ensure financial stability.
Gold is unshakable no matter the circumstances, coming to the rescue when money depreciates. Over the centuries, gold has repeatedly proven its reliability in critical situations. The noble metal is a stabilizing asset that serves as the basis of Financial Security for both countries and individuals.
*The gold standard is a monetary system in which each economic unit of account (national currency) is based on a fixed quantity of gold. For example, the US twenty-dollar bill ($20) was equivalent to one ounce of gold in 1928.