In business, they say that the most liquid of all assets is cash. However, there is one asset that is more valuable than money. You could even say that this asset is worth its weight in gold. That is because gold is the one asset that shines above all others. Used as currency for thousands of years, gold is mankind’s truest measure of wealth. It should come as no surprise, then, that the value of gold skyrockets during times of economic turbulence.
How does the rising value of gold correlate with a bad economy? We would think that one of the main factors is scarcity. When a commodity is rare, its value goes up. To demonstrate this point, think of the famous Honus Wagner baseball card from the early 20th century. If you are lucky enough to find this extremely rare card in good condition, you are an instant millionaire. However, if everyone had the very same card in the very same condition, the value would plummet significantly.
The value of gold, however, works quite differently. While the value of gold does indeed rise and fall with supply and demand, the main reason gold goes up in value during a financial crisis has to do with nothing more than confidence. When people begin to lose their faith and confidence in the government and major financial institutions, they also begin to lose their faith and confidence in the dollar. When too many people lose their faith in the dollar, assets like paper money and stocks and bonds tend to lose their value.
Gold and other precious metals are the big winners during a financial crisis because they represent “real” wealth. A hundred-dollar bill in your pocket, in its most basic state, is only worth the paper it is printed on. It only becomes valuable when we believe that the government and the economy is strong enough to make a piece of paper worth something. Gold does not have to abide by these rules. Even if the dollar is worth nothing and the government collapses, gold will always have value.
Does this mean that we should buy all the gold we possibly can? Of course not. With the current price of gold at such a high price, anyone who purchases a large quantity of gold now will lose money when the economy recovers. In an ideal situation, a person should own just enough gold to hedge their bets against inflation. This is why smart investors invest in everything from stocks and bonds to gold and even grains and livestock. If the value of one commodity rises, it will be offset by a decline in another commodity. The ideal time to invest in gold would’ve been 2 or 3 years ago. With many economists proclaiming that the worst of the recession is over, this 21st Century Gold Rush may be over as well.