The Covid-19 pandemic has created a global shift in our attitudes toward health, work, family, and finances.
With the escalating cost of living crisis, global supply issues, and the uncertainty of a new recession, gold prices still rose by a staggering 28% in 2020.
In our deep-dive article, Cash4Gold-Now examines the key causes of this tremendous increase in value worldwide; including global supply issues, investments, industry uses, and historic changes in gold prices.
Our first step is to review some examples of economic crises of the past, and their effect on gold prices before, during, and after each case.
The Threat of Recession
The value of gold is often the antithesis of stock market values. As the price of stocks begin to decline, the price of gold will generally enjoy an increase in market worth.
Traditionally, gold has risen in market value in the lead-up to a recession, a trend that can first be observed during the Great Depression of 1929-1939 in the US, when gold prices were fixed by the government instead of enjoying the free-market economy of today.
When comparing the history of financial market crashes and recessions in modern times, against the historic rise and fall of gold prices, there is clearly a tangible correlation between both events. For this reason it is important to understand the value that gold represents, and why those who make their money in stocks would turn to gold in preparation of an economic crisis.
The Great Depression 1929 – 1939
Between the years of 1920-1929 the US economy expanded to the point of more than doubling its wealth.
This period is commonly known as ‘The Roaring Twenties’, yet its glamorous depiction in popular culture, such as in books like the Great Gatsby, only offers a very limited view on an otherwise vastly divided economy – where over 60% of the population lived on less than $2,000 a year, a figure which was less than the state classified minimum livable income at the time.
During this time, belief in the surety of America’s rapidly expanding economy led to what was essentially a new gold rush for Wall Street, with both regular citizens and experienced investors scrambling to take out huge loans to facilitate purchasing new stocks on the market.
The possibility of a stock market crash was not fully understood at the time, with most advice genuinely encouraging people to invest heavily in shares, as a means of future proofing their assets.
In an August 1929 article titled “Everybody Ought to Be Rich”, John J. Raskob, a financial executive for DuPont and General Motors, advised Americans to invest $15 a month into the stock market, as it would grow to become $80,000 in 20 years (over $1 million today), stating “almost anyone who is employed can do this if he tries”.
What Raskob failed to understand was that $15 a month was roughly a quarter of most peoples monthly earnings at the time- a statement which not only illustrates the economic divide between rich and poor, but also how blind the wealthy of this time were to the prospect of genuine poverty in such a wealthy nation.
Over-investments continued alongside rising unemployment and industrial shut-downs, as share prices continued to rise. The problem was that predictions in rising share prices were now based on the anticipation of renewed investments in the market, rather than the actual worth they represented. The market was no longer being determined by economic data, but rather the expectation that the rise in share prices would continue.
This problem was made worse by the overproduction, and under-consumption, of consumer goods.
The motor industry, for example, enjoyed great advancements during the twenties, not just in the technology of their cars, but also in the mass production methods used.
But as market shares continued to rise, over-eager auto companies were led to produce huge volumes of cars in anticipation of a buying frenzy that never happened.
This ultimately led to companies presenting disappointing profit results for the financial year, and shareholders panicking to sell before they lost money – specifically on the days of Thursday the 24th and Tuesday the 29th of October 1929, known as Black Thursday and Black Tuesday, respectively, where over 30 million shares were sold over the 2 days.
There is a clear trend of stock market inflations and recessions increasing the value of gold throughout history. The Great Depression was no different, and as we examine more examples of gold prices rising, it becomes clear how the Covid-19 pandemic shares similarities with these trends.
Below you can see a list of average gold prices by year in dollars.
Charts created using data from Inflationdata.com
Between 1833 to 1918, the US government only allowed the price of gold to fluctuate between $18.93 and $18.99 per troy ounce, at a time when dollars could still be redeemed with the Treasury for gold. However, in 1919, this price suddenly increased by almost a dollar.
This change may not seem like a significant increase, but bear in mind that, at this point in time, the price of gold had not changed by more than 6 cents for over 86 years.
The economic downturn of the Great Depression continued into 1933, when the market price of gold rose to $26.33, and again in 1934 to a staggering $34.69.
The Great Depression would not be considered over until 1939, after which the price of gold remained between $33.85 and $35.25 until 1968, when new reforms introduced by president Lyndon B. Johnson allowed for a two-tiered, free-market gold economy to develop in America.
Unfortunately, another recession was looming over the horizon and, following the free-market reform of 1968, we can once again see a huge rise in gold prices foreshadowing a market crash.
The Early 1980s Recessions
The chart pictured above shows gold prices before and during the recessions of the early 80s.
Taking into account our observations from the Great Depression, we can see a sharp increase in gold value in 1973 from $58.42, already a considerable increase from previous years, to $97.39 per troy ounce; preceded by another record rise to $154 in 1974.
The early 80s recessions were exacerbated by a “stop-go” policy introduced by the Federal Reserve throughout the 70s. In essence, this policy aimed to combat high unemployment and high inflation, a principle based on the Phillips curve economic model.
The guiding principle of this policy was a see-saw reaction. During the ‘go’ period, when unemployment was high, interest rates would be lowered to encourage spending, borrowing, and reduce the overheads of businesses to allow for the hiring of more employees.
During the ‘stop’ periods, when inflation was at its highest, the Federal Reserve would increase interest rates in order to reduce the pressure of inflation on the economy.
The Phillips curve model proved unreliable in the long-run, with many countries, including the US, experiencing both high inflation and high unemployment simultaneously.
The recessions of the early 80s were in fact 2 back-to-back recessions in 1980 and 1981-1982, and it is interesting to note that in the case of the Great Depression and the early 80s recessions, gold prices show a sharp decrease in value 2 years after each example, before rising again in the 3rd year.
The Subprime Mortgage Crisis & The Great Recession 2007-2009
Possibly the best-known example of recession in modern times, the Great Recession began with the bursting of the housing bubble in 2005, preceded by the Subprime Mortgage Crisis of 2007-2008. It was officially considered over by June 2009.
Following the Dot Com Bubble of the early 2000s, housing prices began to rise. At this time, banks were offering extremely low-interest rates and minimal deposit requirements on houses, encouraging new investors; speculative buyers, and general consumers to buy property at an extremely fast pace. Even those who were previously unable to afford their own home were now taking advantage of the historically low rates, driving housing prices even higher.
The subprime mortgage scheme was yet-another ill-advised plan for regular citizens to achieve ‘The American Dream’, In which consumers with undesirable credit scores, subprime borrowers, were offered mortgages that featured extremely low interest rates in their first few years, followed by huge increases in interest shortly after. This was an extremely short-sighted plan, considering government-sponsored mortgage lenders such as Fannie Mae and Freddie Mac had positioned themselves to only make money when mortgages were paid, rather than defaulted on.
As the housing bubble began to burst, and interest rates once more rose to a normal figure, home owners that had taken advantage of low-interest rates found themselves in possession of properties they could not realistically afford under the new rates. This quickly led to foreclosures and repossession nationwide, which greatly increased the supply of houses available on the market, at a time when demand was extremely low.
This effectively created an excess supply of houses, without the demand to meet it.
Pictured above, this chart shows the increase in gold prices between 2000 and 2011. In this case we once again see a sharp rise in gold prices in the 3 years before the recession officially began in 2007.
Once again, it becomes clear that a sustained increase in gold prices seems to foreshadow yet another economic crisis, and indeed this trend can still be observed in the Covid-19 pandemic.
Is Gold a Safe Investment in an Economic Crisis?
As can be observed in the charts above, gold consistently holds, and even gains, value more reliably than stocks, houses and technology.
The reason for this is because it is impossible for the value of gold to reduce to zero entirely. It is a precious substance that can transcend its monetary value, as well as be repurposed to suit a variety of needs.
Investment in stocks or the housing market may offer more lucrative gains, but they also present a much greater risk than gold, and for this reason, in uncertain economic times, investors will turn to gold to secure their finances. This is an ethos that is perfectly illustrated in the above examples of recession, where assets such as houses or shares can reduce in value to the point of creating huge losses for the buyer.
Gold is not something that is invested in with the intention of making huge financial gains, but rather as a safeguard against making a loss.
For example, if you were to buy a house for $200,000 today, it could end up only being worth $150,000 the following year due to a number of outside factors, in some cases this can be as simple as more houses being built in the same area, or a general lack of interest from buyers in the area your house is located.
Conversely, if you were to buy $107,520 worth of gold in 2016, then the following year it would be worth $116,200 – not a particularly huge gain, but one that is almost guaranteed year-on-year.
For this reason, it can be concluded that gold offers an extremely safe, reliable method of securing your finances in the long run, with minimal risk of loss.
What will happen after Covid-19?
Following the same trends in gold prices from previously discussed crises, we can see a sharp up-turn in gold value beginning in 2019, a year before the global lockdown, followed by one of the largest Year on Year increases of the 21st century in 2020, to $1773.73 per troy ounce.
Now that we have considered the impact an economic crisis, such as a pandemic or recession, will have on the value of gold, we can now examine factors specific to the Covid-19 pandemic to determine the other causes of this huge increase in value.
The impact that the technology market has on the value of gold cannot be understated, yet for many people the use of gold in everyday items such as computers, phones and cars is not common knowledge.
Gold is used in most microchips as a semiconductor, owing to the fact that gold does not degrade or corrode like other metals such as tin or copper will. It is also highly electrically conductive, and for this reason gold is used for electroplating and wiring in semiconductors, as the strength of the electric signal will not degrade over its lifetime.
In essence, the demand, and therefore value, of gold will increase along with global demand for technological supplies.
Lockdown and the rise of working from home
Following global lockdowns in 2020, the consumer demand for home electronics increased by over 13.1% globally according to PCMag, an increase which had not been seen since 2010 – when smartphones became commonplace items.
Working from home meant the demand for ‘office-based’ technology such as computers, laptops and monitors, had now increased exponentially. For every communal piece of technology you might find in an office, such as a printer or scanner shared between multiple colleagues, it was now a requirement that each person had access to this equipment in their own home, in order to properly perform their job role.
This shift in work dynamic drove production within the technology industry to unexpected heights, and even stalled the release of new, non-priority technology such as the Playstation 5, released later that year – the demand for which is still not being met as of 2022, due to the global semiconductor shortage.
Consumer Electronics vs. The Auto Industry
The automotive industry became an unexpected casualty of the semiconductor rush.
As the Covid-19 virus began to spread across the world, the automotive industry at large decided to reduce global production of cars, in anticipation of decreased demand due to the pandemic.
This decision in itself would have been prudent, and in the short term helped minimise industry losses worldwide, however, an unfortunate consequence of this scaling-back came from the previously mentioned semiconductor rush within the technology industry.
Most modern cars require computational technology to control everything from air conditioning; to fuel-intake, satellite navigation, parking sensors, and more. As auto-companies opted to buy less microchips in early 2020, technology companies wasted no time securing the surplus semiconductors.
The problem was further exacerbated by another unexpected factor- bad luck, as semiconductor factories in Texas and Japan reported huge storms and fires in 2020, and global shipping costs from suppliers increased by more than 10 times from $1,500 to $17,000 at the back end of the year.
In this article we have discussed many of the historical factors that will increase the value of gold, including new, unprecedented circumstances which have further driven the price of gold to record-breaking highs.
The threat of recession has had a huge, if predictable, effect on the prices of gold today, and we can see that the trends of the past are being followed every year, with most experts predicting a new recession beginning in 2023.
What is truly interesting about the rise of gold prices during Covid-19, has been the industries that have unexpectedly driven the value up for the general public. Consumer habits and global crises have managed to cause a huge rise in gold prices, and it can be assumed that these increases will continue into 2023.
As a time-proven method of surviving inflation with your finances intact, there has never been a better time to invest in gold.