Gold is a known as a “safe” investment by big and small investors and national governments alike, but why does the price of gold rise when the economy is causing other traditional investments, like the stock markets, to dramatically fall?

First of all, gold of itself doesn’t really do anything.

It does not generate interest or dividends like a bond or a company share will do.

The allure of gold for investors is that is always in demand by man in general – for jewelry making certainly, but there are also a range of other important uses in technology and medical sectors.

Gold is therefore relatively unique in that people always want it, and because of this intrinsic value, it is perceived as being a safe bet when other forms of investment are affected by a recession, such as the recent financial turmoil.

What Happens When Recession Arrives?

As the recession starts to bite, the value of stocks and bonds starts to fall because corporations make less in profits and very often return losses. This means the cost of the share will fall and also the amount of money available to pay dividends and interest to investors will also fall. The drop in value causes mass selling by institutional investors, and this sends the value of the stock markets even lower.

At this point, billions of dollars of stocks and shares have been sold, so where does all that money go?
Investors can hold the investment proceeds as cash, but this is not a good idea – the value of the cash can drop too, and especially in a recession it is likely to lose value.

What the big investors need is a “safe haven” for the value they are holding and traditionally, the preferred investment has been to buy gold.

Suddenly, billions of dollars of investment money is buying gold and this drives up the price for gold. The more people want something, the more expensive it becomes and this is why gold has soared in value since the start of the economic recession. Today, it stands at over $1,300 per ounce but the increase in the value of gold is only partly due to institutional investors buying so much of it – there is another reason why gold’s value increases in a recession.

Governments buy gold to bolster their currency so it remains strong in both the good and bad times. This has been financial policy for almost every Western government throughout the last century, and now developing economies such as China and India are also doing the same. While many western economies have suffered recently, India has continued to boom and has used the currency it has generated to buy gold in larger volumes than before.

For these two main reasons, institutional investors looking for a safe haven and national governments bolstering their reserves, the price of gold has been driven higher and higher.

As soon as there are positive signs of an economic recovery, the value of gold will start to fall. The reasons for this are simple – they are the reverse of the answers above. Institutional investors will take their capital out of gold (i.e. they’ll sell it) and use the money to buy stocks and shares again on the stock markets, while national governments will not have such a need to bolster their national currencies during times of economic stress. In short, buyers will disappear, more gold will be on the market than there are buyers wanting it and the price will collapse.

This is why it is crucial that those thinking of selling old gold should seriously consider taking action to dispose of their old jewelry and valuables now if they are looking to sell – the price is at an all time high and can fall at any moment.

Author Bio: The best online resource to Sell Gold. Find out more at Gold Seller News from refinity.com

Category: Advice
Keywords: gold, rise in gold, gold prices, rise in gold prices