To me, it seems like gold is the ultimate example of something where the value should go down when the economy, stock market etc go down.

Just like Ferraris, and other frivolous consumer luxury goods, gold has almost no inherent value, beyond what we choose to assign to it. If the economy plummets, people will buy considerably fewer products that are made of gold, much like they will buy considerably fewer Ferraris.

Why does gold's value increase when times are tough? Why do we not see trouble on the stock market lead to increased prices for consumer essentials such as grains, textiles etc - things that have almost no change in demand when there is a change in income because they have real value (stopping people dying).

Note: Answers should be appropriate for countries that have left the gold standard. If there are any countries still on it, answers for those countries aren't what I am looking for.

  • 2
    $\begingroup$ Gold's value derives from its scarity. It is different from Ferraris because gold is universal and its amount is relatively stable despite man's efforts while Ferraris's prudction is controlled by a single company and its amount can in fact flucuate if the company decide to lower its price and produce more of it. $\endgroup$
    – Kun
    Commented Feb 11, 2016 at 2:00
  • $\begingroup$ Maybe gold's value increase because its demand spikes during tough times as people view it as an safe alternative to invest. $\endgroup$
    – Kun
    Commented Feb 11, 2016 at 2:01
  • 1
    $\begingroup$ Kun is pretty much right and, in my opinion, should have made his comment an answer. Gold, as any "rare" resource, is expected to save its value in the future, so it can be sold tomorrow for a good value. However, it should be noted that the value of gold has been on a steady declining trend since 2011 (1800 USD/oz => 1200 USD/oz), so it's far from being an effective value-saving good. $\endgroup$
    – John L.
    Commented Feb 11, 2016 at 12:46
  • $\begingroup$ Well I don't know if many people expect the Ferraris stopping to be scarce soon. I would say the main difference is that gold is (to my knowledge) highly durable, whereas cars are not, or they require significant maintenance costs. $\endgroup$
    – user11629
    Commented Mar 9, 2017 at 9:08
  • $\begingroup$ @ Kun, John. Maybe I am missing something. Is Kun's comment not essentially "gold is a safe haven asset on day x because it was a safe haven asset on day x-1"? It had to start some time, and for some reason. I want to know the original reason gold became a safe haven asset, not why it continues to be seen as a safe haven asset, now it already has that reputation. $\endgroup$
    – Scott
    Commented Mar 9, 2017 at 23:44

6 Answers 6


You could see it as a coordination game and an example of a rational bubble. Because everybody knows that people start buying gold and the price goes up when the economy tanks, it is actually a good strategy to do just that. Similar things happen for example with the Swiss Franc.

The idea that the stock of gold is fixed and hence its price is stable, is empirically just plain wrong.

First, gold production varies with production cost and the demand for gold, just as in other industries. It is also dominated by a couple of countries and big mining companies with tons of market power.

Second, the price of gold is highly volatile, just as other commodities. The standard deviation of gold prices is much higher compared to for example Treasuries or G7 countries' equity indices.

  • 2
    $\begingroup$ This answer, whilst likely correct, just moves the question further back in time. It does not answer how gold started to be viewed as a safe haven investment. $\endgroup$
    – Scott
    Commented Mar 8, 2017 at 22:38
  • $\begingroup$ I would view it as case of multiple equilibria, so it's hard to talk about causality. If market participants coordinated on using something else as a save haven asset, it could in principle serve the same purpose. $\endgroup$
    – Tobias
    Commented Mar 9, 2017 at 11:28

Gold is safe-haven investment for mainly two reasons:

  1. It is a scarce resource.

This alone would not explain why other scarce resources aren't good stores of values. The second reason is:

  1. It has the highest Stock to Flow Ratio of all commodities. The new amount of gold produced every year is only approx. 2% of the gold already in circulation. And producing more than that is difficult. Even if gold appreciates, therefore there's not enough influx of new gold to lower the price. Gold in circulation never runs into a real "shortage", like with many other commodities where demand increases production of supply to reach a new balance.

On top of these, due to the physical characteristics of gold (durability, scarcity, compactness, divisibility, malleability) a consensus on the perceived value of gold emerged during centuries. Therefore, as others said, a cultural and historical component is rooted in its store of value nature.


There is empirical research that the price of gold is linked to the planetary level of combat. A large amount of wealth can be transferred into a small mass making it easy to transport. Because the planetary supply of gold is approximately fixed and very small, it reacts sharply to demand shocks. Gold functions as an alternative currency. It is a good medium for it because it has limited industrial value. In essence, because it is useless for most purposes, other than jewelry it is a good choice. Jewelry makes gold even more valuable and makes it easy for people to wear their wealth as is common in third world countries. Coins and bricks really are inconvenient particularly when fleeing.

The secondary use is between nations to settle debts. It still happens, rarely, but it still happens. Although the gold standard is gone, gold is still something that can be exchanged. It doesn't require physical transport as long as you trust the central bank that is storing your gold.

Gold seems to have supplanted other monies, such as salt or wheat because it is useless. Your question could equally be asked about Yap money, which is still in use or wampum. You can find more on stone money at http://www.npr.org/sections/money/2011/02/15/131934618/the-island-of-stone-money


Consider legal tender as a commodity. Gold is usually seen by some of the market as a substitute for a strong currency. If your currency is really strong and can buy lots of cool things, why store your value in gold when there's perfectly good legal tender that can be accepted everywhere? That is why I claim strong currencies and precious metals are substitutes. But for example, if the dollar is weakening compared to other international currencies, some people flock to precious metals and later, when the dollar is very weak, sell off the gold at a better rate for the dollar back, before the dollar strengthens again.

If you're a country that likes to export a lot of stuff, you can benefit a lot from a weak currency, since it's relatively cheaper for other nations to buy your goods, so that makes them want to buy from your nation more. If you are a nation that imports a lot of things though, then your economy will suffer, since now everything is relatively expensive. And even with exporters, if international businesses think your currency is going to continue weakening, they may hold off on buying from your country until they can really get a bang for their buck (or whatever local currency they use). If expectations about inflation are imperfect, there may be deflation as a result. Additionally, if you're a country that's in a lot of debt, as most major developed economies are, it is harder to pay off foreign debts with a weak currency.

So a combination of these things means that often we see economies with weak currencies facing hard times, and usually a country with a weak currency got that way because of bad economic fundamentals in the first place (e.g. high inflation, currency devaluation). Since gold is a substitute for strong currencies, it makes sense that the price of gold rises as the currency becomes weaker, which usually happens during a bad economy, and more people want to buy gold.


I want to provide a different perspective to those already presented, which is that of culture. As you say, gold has almost no inherent value (at least it had little in the past, before the invention of electronics). However, cultural norms and customs give value to gold.

An interesting example comes from 500's year old book Utopia, by Thomas More, which describes an "ideal" (some might say totalitarian) society, without scarcity, poverty, conflict, et cetera. This society disregards gold (and silver, diamonds, etc), partly by associating gold with slavery.

The context of the quotes below is that of a traveler who spent some time in Utopia, and describes such society to the reader. The quotes in extenso (emphasis mine):

It is certain that all things appear incredible to us in proportion as they differ from known customs; but one who can judge aright will not wonder to find that, since their constitution differs so much from ours, their value of gold and silver should be measured by a very different standard; for since they have no use for money among themselves, but keep it as a provision against events which seldom happen, and between which there are generally long intervening intervals, they value it no farther than it deserves—that is, in proportion to its use. So that it is plain they must prefer iron either to gold or silver, for men can no more live without iron than without fire or water; but Nature has marked out no use for the other metals so essential as not easily to be dispensed with. The folly of men has enhanced the value of gold and silver because of their scarcity; whereas, on the contrary, it is their opinion that Nature, as an indulgent parent, has freely given us all the best things in great abundance, such as water and earth, but has laid up and hid from us the things that are vain and useless.

“If these metals were laid up in any tower in the kingdom it would raise a jealousy of the Prince and Senate, and give birth to that foolish mistrust into which the people are apt to fall — a jealousy of their intending to sacrifice the interest of the public to their own private advantage. If they should work it into vessels, or any sort of plate, they fear that the people might grow too fond of it, and so be unwilling to let the plate be run down, if a war made it necessary, to employ it in paying their soldiers. To prevent all these inconveniences they have fallen upon an expedient which, as it agrees with their other policy, so is it very different from ours [European kingdoms], and will scarce gain belief among us who value gold so much, and lay it up so carefully. They eat and drink out of vessels of earth or glass, which make an agreeable appearance, though formed of brittle materials; while they make their chamber-pots and close-stools of gold and silver, and that not only in their public halls but in their private houses. Of the same metals they likewise make chains and fetters for their slaves, to some of which, as a badge of infamy, they hang an earring of gold, and make others wear a chain or a coronet of the same metal; and thus they take care by all possible means to render gold and silver of no esteem; and from hence it is that while other nations part with their gold and silver as unwillingly as if one tore out their bowels, those of Utopia would look on their giving in all they possess of those metals (when there were any use for them) but as the parting with a trifle, or as we would esteem the loss of a penny! They find pearls on their coasts, and diamonds and carbuncles on their rocks; they do not look after them, but, if they find them by chance, they polish them, and with them they adorn their children, who are delighted with them, and glory in them during their childhood; but when they grow to years, and see that none but children use such baubles, they of their own accord, without being bid by their parents, lay them aside, and would be as much ashamed to use them afterwards as children among us, when they come to years, are of their puppets and other toys.

What this utopian example presents is an alternative cultural setting, one where gold is associated with deplorable things. In this setting gold would not act as a safe haven. Naturally, More is simplifying reality. For example, since other nations outside utopia value gold, holding gold reserves would actually act as accumulating a mean of payment, for example for imports. Still, I think this is a thought-provoking example of how the value society puts on gold might ultimately just be a cultural phenomenon.


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.

Why is gold not a good investment? vic answered Nov 3 2015.

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.

Why does gold have value? Michael Burrows answered Aug 31 2010.

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.

Is physical gold inflation-proof? check123 answered Oct 17 2011.

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.

Is gold inflation-proof or not? pcalc answered Oct 6 2019.

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.

  1. [Gold]'s not "inflation! proof!" Nothing is. But gold rarely if ever suffers inflationary periods

  2. 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.

  3. "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.

  4. 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.

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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.


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