In this article here, http://www.telegraph.co.uk/investing/gold/gold-resurgence-whos-buying-gold-and-why/ , it states that "gold tends to do....best when markets lose faith in central banking".

I understand that gold does well when other assets do badly as it acts as a store of wealth, but I cannot understand why it does well when markets lose faith in central banking. I can see that if central banking isnt working markets are probably doing badly, but the quote seems to imply a deeper and more direct connection.

Also can someone think of a historical example when this happened.

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    $\begingroup$ When people lose faith in central banking, they think their currency will depreciate. When this occurs, they look for something like gold to store their wealth in order to maintain purchasing power. When more people demand gold, the price is driven up $\endgroup$ – DornerA Apr 13 '16 at 23:04
  • $\begingroup$ @DornerA I think my question is more about why is that they think their currency will depreciate if they lose faith in central banking? Also please post this as an answer. $\endgroup$ – Trajan Apr 16 '16 at 8:48

I think @DornerA gave a good answer for reasoning behind the mechanism.

For a historical example, look no further than the fiscal crisis and the rapid increase in gold price from 2008-2011.

Gold price, 10 year sample

Of course a lot happened during those years with house prices collapsing in the U.S. Faith in central banking is closely associated with the value of money and the belief of whether a central bank can keep the economy steady or not and in a situation where this belief is low, people gravitate towards widely accepted stores of wealth.

  • $\begingroup$ Feel free to add a summary of my comment in your answer if you'd like to make it more complete (I'm not going to hound you for credit lol) $\endgroup$ – DornerA Apr 15 '16 at 17:08
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    $\begingroup$ That's an idea, but I'd much rather +1 your comment. :) $\endgroup$ – John L. Apr 15 '16 at 20:59
  • $\begingroup$ Sorry but you havent quite explained what happened in 2012 to make gold decrease in avlue. $\endgroup$ – Trajan Apr 16 '16 at 21:00
  • $\begingroup$ What you see is the market reacting to multiple things with increasing faith on central banking being one of the factors. One could argue that the value of gold is slowly returning to a steady state growth path. $\endgroup$ – John L. Apr 18 '16 at 5:20

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