As a rule, it is well known in economic circles and in the general public that precious metals, including gold, are in demand in times of fiscal uncertainty. And there is a good reason for this.
Precious metals have fundamental qualities that ensure trade stability: they have natural rarity (and not artificially created, as, for example, in the case of cryptocurrencies), tangibility (gold can be held in hands, it is difficult to destroy it randomly), and precious metals are easy to trade.
If you are not trying to make transactions abroad, precious metals are the most universal, most tangible trading platform.
There are a number of restrictions on precious metals, but the most common criticism regarding gold is incorrect in most cases. For example, consider the argument that a limited amount of gold and silver reduces liquidity and creates a trading environment in which almost no one has the currency to trade, because few can get precious metals. This is a naive belief based on logical error.
Gold-backed paper money has existed for centuries along with metals trading. It is rare when there were problems with liquidity, but even when such periods occurred, they did not last long. In fact, the last major liquidity crisis occurred in 1914, in the same year the Fed began to operate, then the First World War began.
This crisis, as always, was almost fabricated by central banks around the world. Benjamin Strong, the head of the New York Fed in 1914 and agent JP Morgan, intervened in gold flow operations in the United States and thus sabotaged the natural functions of the gold standard.
The central banks of Germany, France and England also used influence to disrupt the movement of currency and gold, creating panic on a global level. Apparently, this happened with the help of consciously established cooperation between central banks. Did you know about that?
When gold and currency are linked together, gold prices tend to remain fairly stable, as they are often set by the ministry of finance. In 1914, the price of gold was $ 20 per ounce; this value has been maintained for decades. For comparison, in 1914, an average home was worth $ 3,500, or 175 ounces of gold.
But what happens when gold and national currencies are not connected to each other? Take the hyperinflationary crisis in Weimar Germany. The price of gold per ounce for five years has grown from 170 marks to 87 trillion marks! Over the same five-year period, the price of gold in Germany almost doubled the rate of inflation. This indicates that gold not only coped with the devaluation of the brand, but also enriched any holder of gold in this process.
The common argument against gold is that precious metals are not really wealth creating investments, but simply protecting your purchasing power. As the Weimar crisis proved, this is not always the case. In some cases, often during an economic collapse, precious metals can actually generate even greater wealth than what you invested in them.
Then the question arises of government intervention in gold markets and trade during the crisis. When the Great Depression began in the USA, investors aggressively returned to gold and silver as a means of compensating for the fall in the value of most other assets. Taking a very controversial step in 1933, President Roosevelt banned the private ownership of gold bullion and set the price of gold at $ 35 per ounce.
Keynesian economists, such as Ben Bernanke, often argue that the gold standard was the cause of rising interest rates as depression intensified and that it caused a more severe collapse. They are only half right. The increase in rates really caused a larger and longer crisis, but it had nothing to do with the gold standard.
Obviously, in 2008 the United States and most countries of the world acted outside the gold standard, but we experienced a very similar collapse in credit instruments and stocks, as happened during the Great Depression. In addition, there is no gold standard that would force the Fed to raise interest rates today, but they do so despite the growth of negative indicators in the real economy.
It is not known whether this will cause an even greater economic collapse, but the new Fed chairman Jerome Powell warned in 2012 that this is exactly what could happen. Jerome Powell unequivocally stated that the rate increase will continue under his control in 2018.
Central banks were the main institutions responsible for the Great Depression, not the gold standard, given the fact that central banks did NOT follow a genuine classic gold standard exchange internationally and instead tried to create a global exchange system for baskets of currencies and gold.
Add unnecessary interest rate hikes here as deflation lowered assets and you get the perfect recipe for disaster. Even Ben Bernanke in his 2002 speech openly admitted that the Fed was the main reason for the continued economic massacre during the Great Depression: "According to Friedman and Schwartz, due to institutional changes and erroneous doctrines, the Great Reduction banking panic turned out to be much more serious than during a recession. Let me end my speech by slightly abusing my status as an official representative of the Fed. I would like to turn to Milton and Anna: you are right about the Great Depression, we did it. . But thanks to you, we will no longer let us do so. "
The use of the gold ban led to mixed results. Obviously, this did not stop the Great Depression train. In fact, this exacerbates the difficulties with regard to trade and savings. "Black markets" take everything into their own hands, and precious metals are still in great demand.
As for the 2008 disaster (the collapse that is still ongoing today), we all know what happened to the gold markets. In anticipation of the collapse, from 2004 to 2008, the price of gold doubled. Then, after the initial collapse from 2008 to 2012, it doubled again.
Despite the predictions of major skeptic economists, gold did not collapse to levels noted before the collapse. In fact, gold remains one of the most effective investment funds for many years.
The question is, what will happen next? If you do not take into account the confiscation of gold as a factor, we will see that massive fiat incentives as a means of artificially supporting the deflationary fiscal system, as well as the intervention of the central bank as a whole, lead to the collapse and take-off of solid assets such as gold.
Even with rising interest rates and a potential surge in the dollar index, if the rest of the economy plummets, investors will continue to turn to precious metals.
The initial reaction of gold prices to rising interest rates may be negative. Nevertheless, gold is unlikely to fall as sharply as large economists expect.
As soon as higher interest rates blow off the “bubble” in the stock market, as well as the renewed credit “bubble” and “bubble” in the real estate market, gold will begin to grow rapidly as one of the asset classes with tangible real value.