Gold is a commodity which ranks well above all others in today’s market and has retained value in the economy since 1945. The value of gold either remains constant or increases over time. For long the commodity has been used as the most ideal hedge against inflation, not letting its value depreciate by any means.
Gold is also called a safe haven asset. Change in the price of gold has long been an indicator of a recession or any downturn in the economy. People often prefer the safety of gold when they feel that the value of their investments going down in the future. Traditionally, people hold gold for the same reason. Stacking up on gold refers to holding savings in gold, immune from depreciation in the value of money.
At times of less faith in the value of currency, investors often rush to the safety of commodities.
With high levels of national debt, it often makes sense for governments to let the inflation rise, thus reducing the amount needed to pay back to the buyers of government bonds. This further decreases the value of any savings that people may have. In order to counter this, investors purchase commodities. You must be wondering about the theory behind. The theory is that, with scarce supply the value is likely to remain the same.
This may sound alarming, but practically when people lose faith in currency of a country, they choose to invest in a commodity which will not lose its demand. Commodities are regarded as a safer investment in times of economic turmoil. These commodities have to be backed by the guarantee of a solvent government.
Gold is a veritable commodity, as it comes with a limited supply and also at one point global commodities were backed by gold. There goes a belief, that if a currency were to collapse there would be a rush to go back to the gold standard, spurring people to invest even in difficult times.
The spot price of gold and stocks are inversely related. Gold has long been recognized as a “true standard” of value all across the globe. It also is a standard for worldwide exchange and has been the same since the beginning of time. Gold consistently maintains its value from one country to another and is just not subject to the same systematic risk which is common for the stock market.
Thus, when an economy experiences decline in the market, the stocks and the dollar move downwards. These become less desirable. Gold thus becomes more desirable in keeping with the law of demand and supply. Stocks rise with FDI infusion and gold rises with course of inflation.