In the second week of August, the price of gold fell from a record high of $2,075 per ounce to less than $1,900 per ounce. The drop was the biggest since April 2013, and created another layer of uncertainty in an already chaotic COVID-19 environment. Nonetheless, the fluctuation in price should not alarm you – gold is a historically trusted asset that has shown time and time again that it is a failsafe in unstable conditions.
Gold has been soaring in price over the past few months, and the sudden decline in its upward trajectory is normal. After half a year of daily upticks in price, gold is simply settling down. Still, it remains a resilient form of money, both during the current pandemic and for the long term.
Here’s why you don’t need to be concerned about the drop in gold prices:
Gold prices are already bouncing back
The price of gold has already begun climbing again in small increments. Because gold has experienced a phenomenal run in the past few weeks, the drop and recalibration is a natural calming of the price booms. The upward return is also likely a response to the early signs of the U.S. dollar falling in value. In the third week of August, the dollar index was down 0.2 percent – an over one-week low. Once again, gold is being turned to as a safe haven.
In crises, gold has repeatedly shown that it is dependable, regardless of small price changes along the way. To put things into perspective, gold was one of the only markets to make a gain after the 2008 financial crash.
Stock market assets have fallen in price too
The price of gold has gone up and down, and so have well-performing assets on the stock market. For example, Netflix has seen its share prices boom due to quarantine measures and higher online activity. Yet similar to gold, the company has recently experienced a 10 percent dip in its stock performance because people feared that the positive streak couldn’t last.
While there is no firm correlation between stock prices and the price of gold, both require a level of confidence to maintain a steady price. But unlike shares, gold benefits from a reliable track record, and so even though gold prices may vary, overall it is viewed as lower-risk. For this reason, people typically flood back to buying gold despite its price drops, whereas fluctuations in company share prices have no guarantee of stabilizing and can result in more permanent losses.
Gold can protect you against possible inflation
Governments are continuing to increase currency supplies by creating money from thin air to support things like stimulus packages, lower interest rates, and consumer spending. By the end of 2020, the U.S. Federal Reserve is predicted to have added the equivalent of $3.5 trillion to the U.S. economy. Not to mention, the Fed has announced that it will allow inflation to exceed two percent (two being considered the ‘healthy’ annual inflation rate). These actions increase the likelihood of runaway inflation becoming a reality and devaluing people’s savings and salaries.
The year-on-year percent change in U.S. money supply now exceeds 23 percent. As a point of reference, when Hugo Chávez took office in Venezuela in 1998, the money supply rose by approximately 20 percent in the first year. Chávez’s monetary policy is largely attributed to the country’s dramatic economic downfall, with Venezuela experiencing staggering hyperinflation rates of over 10,000%.
Even with its drop in price, gold can protect people against inflation (which is known as an inflation hedge) because it holds or increases in value while other assets are negatively impacted by inflation. According to a report by the World Gold Council, this is because gold “is a ‘real’ asset that lacks credit or default risks.”
Gold’s dip in price has naturally raised eyebrows for people who look to the precious metal as a safe haven. Yet the fall is an anticipated balancing act as gold prices have been propelled to all-time highs in a short space of time.