What Happens to Bullion Prices During Economic Crises: Does Gold Always Go Up in Value?
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Key Takeaways
- Gold becomes popular during inflation as investors prefer hard assets to depreciating currencies. Gold often rises in value during geopolitical crises as investors seek a more stable asset in uncertain times.
- Gold may or may not rise in value during a recession, depending on the factors driving it. It may jump in a recession stemming from elevated inflation, while it might drop in a recession associated with collapsing inflation.
- Gold might not increase in value during an energy crisis or a period of deflation. This precious metal may also plummet in value during a liquidity crisis, when holders of gold are forced to sell to raise cash.
You work hard, plan hard, and save hard. But what happens when a single geopolitical event threatens to wipe out the nest egg it took days, months, years, and even decades to build?
You turn to gold.
Gold has long been considered a store of value, protecting investors’ money amid shifting geopolitical situations, economic unrest, and periods of inflation. So, does gold always go up in value during these scenarios, or does it stay the same or even dip in value? Let’s explore what happens to gold bullion prices during economic crises.
Gold in Economics
Scenario #1: Crisis Stemming from Currency Weakness and Inflation
When inflation increases sharply, investors steer clear of depreciating currencies and move toward hard assets, which is why gold becomes popular.
Gold is globally recognized as a safe-haven bullion asset that has historically performed well during periods of weakening fiat currencies. It may not rise, however, when central banks increase interest rates significantly to try to overcome inflation. Gold may temporarily fall in this situation since it doesn’t produce a yield (e.g., interest).
Scenario #2: Crisis Stemming from Geopolitical Conflict
When a geopolitical shock happens, gold doesn’t always go up in value, although it often does. Historically, global tensions and wars have motivated investors to seek gold as a more stable asset in times of instability. If the United States dollar strengthens sharply, though, gold may decline because it becomes more expensive for foreign buyers.
Scenario #3: Crisis Stemming from Market Contraction and Recession
Gold usually performs well in a recession, but this pattern isn’t guaranteed. It may do well in one recession but not as well in another downturn.
Gold may rise in a recession when people are increasingly fearful, inflation is elevated, and interest rates are falling. On the contrary, gold might fall in a recession if it spiked before it began or if inflation collapses (in other words, the dollar is becoming stronger).
Scenario #4: Crisis Stemming from Liquidity Stress
Gold doesn’t always go up in value in a liquidity crisis, where not enough money is available and accessible in the system. This type of crisis may cause banks to limit withdrawals. Gold may plummet sharply as investors sell their gold bullion to generate money, pushing the price of gold down temporarily.
Scenario #5: Crisis Stemming from Energy Shocks
Instead of increasing value, an energy crisis can actually cause the opposite to happen. As oil prices rise, inflation expectations may increase, and as interest rates rise in response, gold’s value may decline. A stronger dollar during an energy crisis may also cause gold to dip.
Scenario #6: Crisis Stemming from Deflation
Gold doesn’t always go up in value in a deflationary crisis, where prices, asset values, and wages fall simultaneously. People often hoard cash in response to deflation, rather than investing or spending.
Deflation increases cash’s real value, decreasing the demand for gold. However, extreme deflation tied to a systemic collapse may motivate investors to purchase gold as their fallback currency.
Does Gold Always Go Up in Value In Different Types of Crises?
| Type of Crisis | Does Gold Usually Rise? | Why Gold May Not Rise |
|---|---|---|
| Inflation Crisis | Yes | High interest rates suppress gold |
| Geopolitical Crisis | Yes | Strong dollar causes gold to drop |
| Recession | Usually | Every recession is different |
| Liquidity Trouble | No | Gold drops due to forced selling |
| Energy Shock | Sometimes | Interest rate hikes and a strong dollar |
| Deflation | Sometimes | Cash increases in value |
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FAQ
Do gold assets outperform stocks during all crises?
Gold doesn’t always go up in value and outperform a stock in a crisis stemming from a rapid rate hike or strong dollar cycle. Gold, however, does outperform stocks during a crisis characterized by currency instability, fear, and inflation, as investors often prefer tangible assets in these scenarios
Could a mining supply disruption impact gold prices in an economic crisis?
Yes. The supply chain can be unpredictable during a crisis. If a mining operation shuts down due to pandemic-related restrictions, energy shortages, geopolitical instability, or labor strikes, the supply of newly mined gold will tighten, driving prices higher.
Should I choose gold bullion or real estate in an economic crisis?
Since gold is liquid while real estate isn’t, they generally behave oppositely in a crisis. Property values can fall or remain stagnant if banks tighten their lending standards and the mortgage rates increase in a crisis. Gold assets, on the other hand, may rise or hold steady if people become fearful of a weakening dollar and rely on real estate or other non-bullion investments.