In the past 14 months, there have been numerous comparisons made between our current economic climate and the 2008 financial crisis, also known as the Global Financial Crisis. We have also seen an uptick in chatter about the future of gold as a “safe haven” for investors when stocks are down. Today, let’s take a deep dive into the history of the GFC and role of gold.
The Global Financial Crisis
The GFC had its roots in the United States, where the housing market had been booming for several years. Housing prices had reached unprecedented heights, and many people had taken out mortgages they could not afford. When the housing bubble burst, many people defaulted on their loans, and banks began to suffer significant losses. The crisis quickly spread to other financial sectors, causing a domino effect of financial failures and bankruptcies around the world, including the banking and insurance industries, as well as the stock market.
Investor Reaction to 2008
During the financial crisis, investors around the world began to panic. They were worried about the stability of the financial system, and many of them began to sell off their investments. As a result, the stock market experienced significant losses, and the value of many other assets, such as real estate and commodities, plummeted.
However, when we review this period the price of gold behaved differently. While most other assets were losing value, the price of gold was increasing. This is because gold is often seen as a safe haven asset during times of economic uncertainty. When investors are worried about the stability of the financial system, they tend to turn to gold as a store of value.
As the financial crisis worsened, the demand for gold increased. Investors were willing to pay more for gold because they saw it as a safe investment in uncertain times. In the first half of 2008, the price of gold was around $850 per ounce. However, by the end of the year, the price had increased to over $1,000 per ounce, for a gain of 17.65%.
Gold As A Safe Haven
The price of gold continued to rise in the following years, reaching an all-time high of $1,921 per ounce in September 2011. This was a significant increase from its pre-crisis levels, and it reflected the high demand for gold as an escape for investors from the floundering stock market.
There were several factors that contributed to the rise in the price of gold during the financial crisis. One of the main factors was the low interest rates set by central banks around the world. As interest rates fell, the opportunity cost of holding gold decreased. This made gold a more attractive investment compared to other assets.
Another factor that contributed to the rise in the price of gold was the devaluation of currencies. During the financial crisis, many countries around the world implemented policies to stimulate their economies, such as quantitative easing. These policies often involved printing more money, which led to the devaluation of currencies. As the value of paper currencies fell, the value of gold increased.
Gold Has It’s Moment
The rise in the price of gold during the financial crisis had significant implications for investors and the global economy. For investors, gold provided a safe haven during a time of economic uncertainty. Those who invested in gold during the financial crisis were able to preserve their wealth and avoid significant losses.
For the global economy, the rise in the price of gold highlighted the instability of the financial system. The fact that investors were willing to pay more for gold than ever before demonstrated the lack of confidence in other assets, such as stocks and real estate. It also showed that investors were concerned about the actions of central banks and the potential devaluation of currencies.
Current Climate And The Future Of Gold
Now that we are staring another round of banking failures in the face, we are seeing the flight to gold begin again. Gold spot prices have rocketed from $1808 per ounce on February 24th to $1964.50 per ounce as of today’s writing on March 29th. The next quarters will reveal how the economy will progress, but we can be equipped with this historical knowledge to hopefully learn from the past and not be “doomed to repeat it”.