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How Does the Economy Affect the Price of Gold?

Price of Gold

While supply and demand are the primary factors in determining the price of most goods, including coins, the price of gold and precious metals is affected by a number of more complex variables. One of these is political or economic instability. The U.S. economy has experienced a great deal of instability over the past decades and was nearly brought down entirely by the Financial Crisis of 2008, the worst economic disaster since the Great Depression. The fear that accompanies these types of events directly impacts the price of gold. This is why we saw the price of gold skyrocket in the years following 2008.

For anyone who has accumulated any wealth, asset security is a real concern. For decades the stock market was seen as a place where one could get a reasonable return on an investment, especially over longer periods of time. After multiple stock market crashes, the collapse of the tech bubble, and the near total collapse of the market in 2008, that is less true. Risk averse investors will now accept a lower rate of return for the assurance that their assets will not disappear overnight, and gold is one of the safe havens they flock to when currency markets are volatile. Gold coins and bullion at least are tangible assets in a way that paper stock shares can never be. It’s hard to have true confidence in numbers on a computer screen. It’s not like holding a bar of gold in your hands.

People also buy gold as a hedge against inflation. The price of gold goes up and down over time, but it has inherent value and has had it for millennia. Pharoahs, emperors, conquistadors, and kings have all valued gold, and people continue to value it today. You would be hard pressed to find a culture on earth that does not value gold and would not use it as a medium for transaction. Unlike paper money, or fiat currency, it has inherent value that is fairly stable over time - which is why countries used to peg their currency to the supply of gold they had in reserves. In fact, when a country’s currency is directly linked to gold - the gold standard - inflation remains low because people know that they can exchange that currency for a fixed amount of gold and that gold is something most everyone will accept in exchange for goods or services.

Fear about the economy and the instability of other currencies directly impact the demand for and price of gold. People want to have an asset that retains its value over time and can be used as a medium of exchange anywhere and anytime. This is why there will always be a demand for gold. This does not mean that buying gold is always the best choice or that all of your financial assets should be in gold. Buying gold during a panic is a good way to take a financial hit in the longer term.

Finally, while gold is a solid investment choice and Mullen Coins endorses the philosophy of investing 5%-10% of one’s total assets in physical gold and silver as a hedge against the unknown, we recommend that you buy gold only through a reputable dealer. There are too many charlatans out there ready to take your fiat currency, so please do your research and buy with care.

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