International geopolitical instability , with points of conflict such as the Hong Kong protests, the trade war between China and the United States, the intensification of tensions with Iran, the coronavirus epidemic has skyrocketed in recent months, causing a rise in the gold price. In this post we are going to explain the historical relationship that exists between crises and the price of metal.
Gold is currently experiencing its most positive moments since 2013, with a price that is getting closer and closer to $1,600 an ounce . After the rise registered in 2019 (more than 18% in dollars), 2020 has maintained this trend, thanks to the boost provided by the geopolitical factors already mentioned.
The coronavirus epidemic in China has been the latest factor to be added. The implications that this pandemic could have on the global economy, about which there are already enough doubts, could be decisive for the triggering of a new crisis.
These crises are very damaging to the economy, as recessions (negative economic growth for at least two consecutive months) that are accompanied by financial crises are at least 50% deeper .
An example is the crisis suffered by the Japanese economy after the bursting of the real estate and financial bubble in 1989, which plunged the country into a recession for a decade.
The same happened with the Great Depression after the stock market crash of 1929 in the United States, aggravated by the panic of bank customers, or the Great Recession , after the burst of the ‘subprime’ mortgage bubble , which became an international banking crisis and a sovereign debt crisis.
Gold and crisis
Precisely at the times when these crises break out, causing investor confidence in the financial system to plummet, is when gold shines its brightest .
As can be seen in the attached graph, during the main crises that have taken place during the last 30 years of the 20th century and the first 15 of the 21st century, the price of gold has experienced significant increases .
This was the case during the Latin American debt crisis of 1982 , when the countries of this continent reached a point where their external debt exceeded their purchasing power and they were unable to repay the loans received from abroad for their industrialization.
The price of gold rose from less than $300 to more than $500 an ounce in just a few months.
The same thing happened in the aforementioned crisis in Japan, at the beginning of the 90s; during the 1997 Asian financial crisis; after the burst of the ‘dotcom’ bubble in 2000; or after the bankruptcy of Lehman Brothers in 2008.
As they point out in the study, the best years for gold tend to be those immediately after the crisis , in which the lack of confidence in other assets and the urgent need for liquidity causes an increase in demand for the metal.
Gold as defense and diversification
For these reasons, the main fund managers recommend to their clients, even the most risk-addicted, a certain positioning of gold in their investment portfolios so that, when a crisis comes, the metal plays its protective and diversifying role the most prudent investors or simple savers, acquiring physical gold with the surplus of their savings is always a good practice, giving them the security that even in the most difficult economic environments their wealth will remain intact.