- By Mustafa
The world has become interconnected, credits to globalization. Something that has surely benefitted from global exposure is the financial sector, also maybe Starbucks which has opened 31,250+ of its stores worldwide. But we are not here to talk about the brewing cup of coffee. As the financial sector is experiencing fusion, economies, both developed and developing are having the cream of the crop. But then the question arises ‘Is it foolproof?’, and it is not. As economies shatter during global recession or depression and during these hard times, steps in our subject Gold and provide a cushion.
It is fairly evident that during the times of economic failures or emergencies, be it the 1997 Asian Financial crisis, US Bubble of 2000, 2008 Global recession, or the 2020 pandemic, when the global market is shrugging off, the value of gold booms up. This happens because Gold is considered a safe asset to fall-back on.
When markets crash, demand for gold shoots up because of high uncertainty in the market. In contrast, gold provides security and higher liquidity which in simple terms can be said as the relationship between markets and gold is inverse. But that is not the case and that is where we dive a bit deep. There are several instances when Gold and the economies move in the same direction. This is because though the price of Gold booms up during economic busts, but Gold actually has an inverse relationship with the Currency.
Let us take US Dollar (USD) as the currency here and the golden asset of Gold. Whenever USD depreciates we find a surge in Gold prices and whenever USD appreciates, Gold prices take a bump. A fun fact here is that Indians have decoded this for a long time. In India, gold is considered auspicious, and relatives especially during important ceremonies, present Gold. As people could use the Gold during tough times when the currency fails to provide stability and Gold does so. Also, this is the reason why investors keep Gold as a secret asset in their portfolio.