For years, gold has been considered the protective asset par excellence, being able to safeguard capital against strong inflation or currency devaluations. However, this is not the only reason why gold is considered one of the most solid investments: it also can survive stock market crashes.
This does not mean that gold cannot produce losses. In certain situations, gold has dropped significantly in price, but whenever it has done so, it has always been when the market has stabilized again.
All this leads us to conclude that gold is an asset that revalues in bad economic periods and tends to fall when other assets rise. This quality is only possessed by one other precious metal and that is silver.
In this article, we will study a little about how gold behaves in the face of stock market crashes, and how it ends up managing its price during these periods of decline.
Gold has its own market
One characteristic that many investors know about gold is its ability to support its price better when the stock market crashes. This is mainly because gold, although it can share shares in the stock market, has its market based on demand.
This means that part of its stability is because, in bad economic periods, institutions and individuals buy gold to safeguard their assets, creating speculation in the price and increasing it greatly. Although a bubble is not created around it, it can be said that when the markets return to normal, the price of gold falls.
An example of this can be seen in the economic recession of the year 2000, where there was a 49% plunge in the stock market. However, both gold and silver did not lose their value and by 2003, when the situation began to stabilize, investors made a gain of up to 68%.
Another example can be taken from the 2008 financial crisis, where there were widespread losses across the board of up to 57%. Silver managed to hold on a little longer with a loss of up to 51%, but gold managed to live up to its title as the most stable asset, only devaluing by 25%.
However, when the stock markets stabilized again, silver was able to do so in a unique way with a 446% gain (mainly due to its liquidity and its need in various recovering markets) and gold was also able to recover with gains of up to 173%.
The truth is that this characteristic can be seen even in situations such as those presented in 2019 with the pandemic where gold maintained its value. Finally, gold has also been present in the political conflicts that Russia currently has, where the stock market has fallen by 12.5% and gold has managed to revalue by 6.7%.
However, investing in gold to protect against stock market declines has its tricks
Capital protection against stock market declines makes gold an excellent investment asset, but it also has a downside that many tend not to see. Gold is an asset that appreciates in difficult periods, but whose price decreases in stable markets.
A clear example is the year 2015 when the stock markets were in one of the best situations they have ever experienced. In December of that year, gold reached a loss of 45%, since its demand was quite low and its price was equaling that of the stock market.
Being able to anticipate these types of bad economic periods and investing in gold is a simple way to make a profit. However, it requires knowledge and experience to anticipate these events.
On the other hand, to be able to safeguard capital does not require such foresight: gold is an asset that is usually very stable and extremely liquid, so at the first sign of a downturn in the economy or increase in inflation it should be bought.
Eventually, gold holds its new value by rising in price until the markets normalize. Again, anticipating when this will occur will generate even more profits for a good investor.
Knowing that gold is not affected by stock market declines, what affects its price?
Although it is one of the safest assets to protect, this does not mean that its price cannot fall. Gold is appreciated mainly for its rarity, its relation to luxury and its usefulness in certain industries.
This means that the value of gold can decline at certain times, such as an increase in the flow of gold to the market. The less rare gold is and the more suppliers there are, the lower its price tends to fall.
Also, when there is paralysis of activity by the industries that use gold as a component, it drops enormously.
On the other hand, some events also affect its price positively. A clear example is the wedding season in India, where, since gold tends to be considered a gift for ceremonies, its price is revalued in the face of demand.
Then, is gold a good investment?
Gold is an excellent investment if you know how to use it. The stock market may not be as stable as this precious metal, but it tends to generate dividends constantly. On the other hand, the gain from gold is only around its buying and selling value.
Expert investor Warren Buffet considers gold an investment primarily designed to safeguard capital. Since its value is entirely based on demand, you can only make a profit from it if someone pays more for the metal than it cost you to buy it.
Therefore, before investing in this metal, we must take into account the reasons why we want to buy it. If we want to make a profit, it should be just when we are sure that inflationary periods or market falls will begin, otherwise, gold only works to protect our money safely.
Regardless of how we use it, one thing is clear: gold also provides us with stability, so if our investment is not going the way we want, it is one of the assets we can sell and recover what we have lost.