This is answered in many threads on Money SE. I'll quote just some.
Why do people prefer to buy gold when stock market moves downward? Simon B answered Feb 23 2020.
Gold is considered a safe haven when everything else is going wrong. When the economy is doing well, gold has the big disadvantage that it pays neither interest nor dividends. You buy it, sit on it, and hope that it gradually goes up in price with inflation.
When the economy is failing, gold has obvious advantages. Shares can lose all their value if the company goes bust. The same goes for bonds issued by a company. As central banks intervene, interest rates go down, to the point where they are less than inflation. At that point, gold looks tempting.
If you are particularly pessimistic, then you might be worried that the central bank will introduce negative interest rates on savings. Alternatively, ill-considered attempts by the government to keep up public spending might cause hyperinflation. At this point, gold becomes a way of saving your wealth from economic collapse.
So people buy gold as a way of preserving their wealth, even if the price seems high.
I would add that gold has the advantage over other commodities that it is valuable in small quantities, standardized and easily portable. So you can buy it and hoard it at home. And if everything really does go wrong, you can take it with you when you abandon your home and become an economic migrant.
Bob Baerker answered Feb 23 2020.
Regarding gold, for the past three recessions:
In 1990, it lost about 10% of its value
In 2000, it did nothing
In 2008 it dropped 30% from its peak price before recovering and ending up 4% for the year.
Gold is ‘iffy’ during recessions.
I think what the person meant to say is that Gold is not a one stop solution. There's nothing wrong with having Gold in an otherwise diversified portfolio but you need to be aware about the potential downsides:
- Gold doesn't pay any income in form of coupons or dividends. So even if the price doesn't move at all, in real terms you will have lost money (assuming inflation above 0)
- While it may be true that in the very long run the price of gold is stable (disputable), gold can have strong fluctuations in value. So if you find yourself in a position that you have to sell, you might to so at a big loss.
The problem with gold is that its value nowadays depends mainly on investor confidence, or the lack of it (actual demand for gold cannot explain the rise in value gold had after the crisis). If people are afraid the world and currencies with it will go to hell, the gold price will go up. Why? Because if currencies seize to exist, Gold will still be accepted. It can replace currencies.
What many people tend to forget: let's consider the extreme example and currencies really cease to exist and all hell breaks lose. What good are gold bars at the bank, or even at home, for that matter? You'll be better off with gold coins to use in barter and to pay off marauders. But that's not about investing anymore, that's survivalism.
JTP answered Jun 5 '10.
For short periods, gold will provide a decent hedge, but no better than other financial instruments. We are now in an odd time, where the stock market is generally flat to where it was 10 years ago, and both cash or most commodities were a better choice. Look at sufficiently long periods of time, and gold fails.
In my history, I graduated college in 1984, and in the summer of 82 played in the commodities market. Gold peaked at \$850 or so. Now it's \$1200. 50% over 30 years is hardly a storehouse of value now, is it? Yet, I recall Aug 25, 1987 when the Dow peaked at 2750. No, I didn't call the top. But I did talk to a friend advising that I ignore the short term, at 25 with little invested, I only concerned myself with long term plans. The Dow crashed from there, but even today just over 18,000 the return has averaged 7.07% plus dividends. A lengthy tangent, but important to understand.
A gold fan will be able to produce his own observation, citing that some percent of one's holding in gold, adjusted to maintain a balanced allocation would create more positive returns than I claim. For a large enough portfolio that's otherwise well diversified, this may be true, just not something I choose to invest in. Last - if you wish to buy gold, avoid the hard metal. GLD trades as 1/10 oz of gold and has a tiny commission as it trades like a stock. The buy/sell on a 1oz gold piece will cost you 4-6%. That's no way to invest.
Update - 29 years after that lunch in 1987, the Dow was at 18448, a return of 6.78% CAGR plus dividends. Another 6 years since this question was asked and Gold hasn't moved, $1175, and 6 years' worth of fees, 2.4% if you buy the GLD ETF. From the '82 high of \$850 to now (34 years), the return has a CAGR of .96%/yr or .56% after fees. To be fair, I picked a relative high, that \$850. But I did the same choosing the pre-crash 2750 high on the Dow.
To start with gold has value because it is scarce, durable, attractive and can be made into jewellery. But that does not explain its current value. In the current economic climate, it is difficult for many investors to get a positive return on conventional investments such as equities or bonds. I theorise that, in such conditions, investors decide to park their money in gold simply because there are few other good options. This in itself drives the price of gold up, making it a better investment and causing a speculative boom. As you will see here, here, and here the gold price is negatively correlated with stock market indices.
Whats the use of having a lot of gold, when no one buys it? quid answered May 10 2018.
Gold is used to hedge inflation and currency risk. Really most commodities can serve this function, gold just happens to be the most popular one. People have an affinity to gold because the dollar used to be specifically backed by, and directly exchangeable for, gold. Similarly, if you wanted to choose a different commodity to serve as your currency/inflation hedge, gold is easy to store and won't go bad. It would be hard to hedge your assets with grains because those go bad, or highly utilized commodities like steel or oil because of various market demands. Of commodities, gold is relatively stable.
As I argued in the comment to your question, your assumption is flawed. Here are some facts that counter your assumption (link to resource):
- Fact #1: Gold went from \$105 in 1976 to \$850 in January, 1980. Consumer prices increased by about 28%. Verify this here.
- Fact #2: Gold went from \$850 in 1980 to \$256 in 2001. Consumer prices more than doubled.
- Fact #3: Gold went from \$256 in 2001 to \$1,011 in March, 2008. Consumer prices went up about 20%.
This is also pretty good article on Comparing correlation between Gold and Inflation.
410 gone answered Oct 15 2011.
A blanked statement that "gold is inflation proof" doesn't stack up historically - one can pick various pairs of points in time to show gold rising as prices rise; or gold falling as prices rise. And periods of deflation are, happily, sufficiently rare to be able to draw any meaningful conclusions either way.
As Willem Buiter explained in the Financial Times, gold is a fiat commodity: its price is almost entirely driven by speculative demand and supply, through traded instruments. Its industrial and vanity uses form a very small proportion of demand. Hence "fiat" - its price is determined by people perceiving and trusting it has value; rather than by its utility. Its intrinsic value (to the extent that "intrinsic value" ever exists) is very very low. Its market price exists purely because of a common superstition about it being a store of value.
As such, there's no reason why its price should vary inversely with a dollar inflation index: the dollar inflation index will reflect changes in a basket of consumer goods, which will have virtually nothing to do with gold.
Similarly, as a good in its own right, it will experience inflation: during the last few years, it's experienced significant price rises, after the introduction of a group of ETFs swelled speculative demand.
I would call an asset inflation proof if it appreciates at least at the inflation rate. Since no one can guarantee this for any asset which is freely tradeable, I'd weaken this term to: The asset has to have at least kept up with the inflation rate in 9 out of 10 years.
Now let's come back to gold. Take a look at some historical gold prices and US inflation rates. For example, in Jan/2013 we had a gold price of about $1850_**, while in **_Jan/2016_** it was about **_$1160. In those years, US inflation was approximately 1.5%, 1.6%, and 0.1%. So while gold lost almost 40%, the inflation rate was positive.
According to my definition above, gold doesn't seem to be inflation proof since this isn't the only time span when this happened.
But history has proven gold to be a must have asset in crisis which might be the reason for the drop in gold's price that I described. If we look at gold's price between 2007, the year before Lehman Brothers went bankrupt and 2011, which might be the year when things started to get better again, gold rose from approximately $800_** to **_$1800.
Finally, gold doesn't pay interest or dividends so if you want to outperform inflation by having gold, you rely on growth in gold's price. On the contrary, if you own some blue-chip stocks, which pay high dividends, even if stock price remains at the same level, you may have a chance to outperform inflation rate (but of course you might still lose, because of a drop in stock price).
Fattie answered Oct 7 2019.
[Gold]'s not "inflation! proof!" Nothing is. But gold rarely if ever suffers inflationary periods
Considering hyperinflation. Gold has never suffered hyperinflation. You could confidently say it is hyperinflationproof. Whereas it's a commonplace in history that fiat currencies suffer hyperinflation. So that might be what you have in mind.
"We can't print gold" but we mine it. Indeed historically, when there has been gold find somewhere, the "price has gone down" in general. (But not a lot, not like when government currencies collapse, as they often do.) So sure, of course obviously, the scarcity of gold ("we can't print it - it is created only when neutron stars collide"* ) is the reason, sure, you're correct. No mystery.
The practical upshoot of buying gold. The OP will be between 20 and 50 yrs old. OP will live for another 20-50 years. The simple fact is, owning gold is a "decades" thing. If you're thinking of buying some gold for a year or two, just forget it. It's trivial to point to periods of 10 or 20 years when gold consistently went up and it's trivial to point to periods of 10 or 20 years when gold consistently went down.
I can absolutely assure you that if you own a lot of gold for 10 or 20 years during an up run, you'll feel terribly clever.
And I can absolutely assure you that if you own a lot of gold for 10 or 20 years during a down run, you'll have made a big hole in your life. Abstract statements about hedging inflation will go by the wayside. I really wouldn't worry either way about vague conjectures like "if inflation..."
Does gold's value decrease over time due to the fact that it is being continuously mined? muro answered Aug 4 2011.
Why did I include a chart of the FED's balance sheet? Because this is the way newly printed money is introduced - the FED will purchase something from banks (mortgage-backed securities, US treasuries, etc.) with newly printed money. The banks can then loan this money to people who then deposit the money into other banks who loan those deposits to other people and so on. This is how the fractional reserve process expands the money supply. This is why I did not include a chart of the money supply since that is counting the same money multiple times. If I deposited 100 newly minted coins into a bank and that bank proceeded to loan out 80 of my coins where 80 are deposited into another bank who then proceeds to loan out 60 of the coins, and so on....the production of coins only changed by the initial 100 that I minted - not by the fractional reserve multiple.
There are historical examples of inflation with gold and silver as duff has pointed out. None of them come close in magnitude to the inflation experienced with government fiat money.
warren answered Aug 4 2011..
The relative value of Gold (or any other commodity) as measured against any given currency (such as the USD), is not a constant function either. If you have inflationary pressure, the "value" of an ounce of gold (or barrel of oil, etc) may "double", but it's really because the underlying comparator has lost "half" its value.
Paul answered Aug 5 2011.
The previous answers have raised very good points, but I believe one facet of this has been neglected. While it's true that the total accessible supply of gold keeps growing(although rather slowly as was mentioned earlier) the fact remains that gold, like oil, is a non-renewable natural resource. So, at some point, we are going to run out of gold to mine. Due to this fact, I believe gold will always be highly valued. Of course it can certainly always fluctuate in value. In fact, I expect in the reasonably near future to see a decline in the price of gold due to investors selling it en masse to re-enter the stock market when the economy has recovered more substantially.
What is the best way to invest in gold as a hedge against inflation without having to hold physical gold? JTP answered on Aug 13 2011.
A comment brought me back to this question. My answer still applies, the ETF the best way to buy gold at the lowest transaction cost. The day I posted and expressed my 'bubble' concern, gold was \$1746. Today, nearly 5 years later, it's \$1350, a drop of 23%, plus an additional 2% of accumulated expenses. Note, GLD has a .4% annual expense. On the other hand, the S&P is up 80% from that time. In other words, \$10K invested that day would be worth less than \$7,700 had it been invested in gold, and \$18,000 in stock. It would take a market crash, gold soaring or some combination of the two for gold to have been the right choice then. No one can predict short term movement of either the market or metals, my answer here wasn't prescient, just lucky.