Most psychologists say that knowing your fears allows you to overcome them. While our individual fears influence several aspects of our lives, our collective fears influence market trends. For example, the rise and fall in gold prices can be attributed to a number of fears that compels investors to buy or sell the valuable metal.
In the next few paragraphs, we will be discussing the fears that compel people to turn to gold to save their investment.
Fear of Inflation
This is the number one fear that forces people to turn to gold. Inflation erodes the value of paper currency. With the rise in prices of goods, there is a general feeling of fear that the saving portfolio will cease to be of any value.
Inflation occurs due to increased influx of paper money without the corresponding increase in production. This results in an increase in general prices of goods due to the demand and supply imbalances. The consequences of inflation is that the paper money loses its value.
Gold is considered as a great inflation buster. Various studies have pointed out that gold is effective in hedging against inflation in the long run. Even though the price of gold has seen a decreasing trend for the past two years, the price of gold is still much higher as compared to the previous two decades. There is no denying the inflation hedging power of gold. The fear of inflation compels people to resort to the ancient metallic currency to hedge against their investments.
Fear that Paper Currency will Return to Its Intrinsic Value (Zero)
According to Voltaire, paper money eventually returns to its original value, i.e. zero. This view is shared by billions of people around the world and is one of the reasons that cause an increase in the price of gold.
Throughout history, there has been a continuous decrease in the purchasing power of paper currency. The dollar, for instance, has declined by more than 90% since 1950. Excessive spending by the government results in increase in the money supply in the economy. This increased money supply, in effect, decreases the value of the currency.
The real value of paper currency hinges on the amount of money in circulation in the economy. As more and more people get hold of this money, it decreases its value due to the inflation effect described earlier. Gold, on the other hand, has specific characteristics that maintain its value in the long run.
Fear that Stock Markets will Collapse
Finally, the fear that the stock market will collapse is an important, if not the foremost, fear that results in an increase in the price of gold. The financial crises of 1930s occurred due to stock market crash. This stock market crash, which crushed the lives of millions of Americans, still haunts the nation’s memory.
A dip in the stock market indexes, even if it is for a short duration, results in a general tremor, which results in people turning to gold trade to save their investments.
