Gold is an extremely popular asset that many investors hold when it comes to times of economic crises, using it to a hedge against a declining market.
But how well does this hedge hold up when the stock market crashes?
If you’re aware of the effects that a stock crash could have on gold, then you’ll be able to make an informed decision on what investments to make.
The typical assumption is that the price of Gold would fall alongside the price of the stocks, but this might not be the case, and it is entirely possible that the price of gold would actually rise.
We’ll take a look back at previous stock crashes, and look at the effect on the price of gold, so you know what happens to gold when stocks crash!
In The Past
When evaluating stock market crashes that have occurred previously, it is easy to measure the performance of gold, and then to decide on whether or not to invest in it during times of crisis.
Generally, when a market crash occurs, the price of gold actually rises, regardless of whether the crash lasted a few months or even a few years.
In fact, the biggest crash in recent history (October 2007 – March 2009) still saw gold’s value rise by nearly 10%!
Therefore, when it comes to trying to predict gold’s price in times of a crash, based on history, you should assume that the price of gold will at the least stay the same, if not rise!
Don’t Panic
The assumption that gold’s price will fall when the stock market crashes comes as a result of the 2008 financial recession, where gold’s value did fall initially in the shock.
This is why so many investors tend to believe that gold’s price falls in these types of situations. In reality, gold’s price actually rebounded well compared to the S&P, and ended up rising by 5.5%.
In fact, across that entire 18 month period, gold’s price saw an increase of over 25%.
So whilst gold’s initial drop in a market crash might panic investors, remember that the likelihood is that it’ll rebounded well, so don’t panic!
The Exception
Gold has only ever experienced one particularly large selloff that is actually significant, which was during the 1980s.
However, it is worth noting that this selloff came soon after it had just witnessed its biggest bull market in recent history, with the price of gold rising 2,300% from its low in the 1970s all the way to its peak in the 1980s, so it was naturally going to drop alongside the stock market at that point.
The worst bear market (see also ‘What Is A Death Cross In Stocks?‘) gold endured was a 45% delice between 2011 and 2016, which was considered one of the worst bear markets in recent history, but then again it wasn’t a surprise for many people, especially given how quickly it gained in the 2008 crisis, as well as the 2011 crash.
Gold’s Market Behavior
A lot of people wonder why gold tends to perform so well even if the rest of the market is struggling, when the answer is actually incredibly simple, the two are negatively correlated.
Essentially, when one rises, the other falls. And vice versa.
Whilst this might seem strange at first, there is actually some logic behind it. Stocks will benefit from economic growth and stability, whereas gold tends to benefit from economic crisises and crashes.
When the stock market value crashes, a lot of investors usually switch from their typical investments to the safety of gold.
Therefore, if the market is stable and growing well, then a lot of the mainstream investors don’t see a need in to purchase any gold.
This negative correlation is supported by historical data too, on average, when the stock market crashes, gold has risen a lot more times than it declined.
In addition to this, gold has outperformed whatever cash you’ll have kept in your accounts too. In fact, even real estate values only seem to follow gold’s prices less than half the time.
It doesn’t mean that gold will always rise when it comes to stock market downticking slightly.
But, when it comes to particularly large crises, history shows that gold is often a safe bet for investors scrambling to find a safe haven.
So as a general rule, if the market is healthy and stable, then you’ll probably want to own less gold than usual.
On the other hand, if you feel like that the market could be heading for a crash or sharp decline, then it would be smart to begin buying some.
It’s always worth noting that gold’s increase isn’t entirely dependent on the stock market’s fluctuation, and it could be down to economic issues as well as inflationairy issues too, so it’s just important to remember that it isn’t uncommon for some people to be drawn to gold for reasons that might not be related to S&P’s performance.
A crashed market can take a considerable amount of time to recover too, and the inflation that can occur whilst waiting for the market to restablize can actually cripple an investor’s buying power too.
Which is why the best defense against against a potentially crashing market, and an the corroding effect that can occur as a result of inflation, is to invest in gold!
Summary
To summarise, gold is a popular asset amongst investors when the market is looking likely to destablize or crash, this is as a result of its negative correlation in regards to the stock market, with gold’s value often rising when the stocks crash, which leads many investors srambling to buy it once it happens.
As such, you should consider investing a small amount into gold should you feel like the market is in an unstable position.
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