Part I of our series on gold prices addressed the impact of interest rates and inflation on gold, and Part II discussed the relationship between other industry trends and gold. In each of these scenarios, smart investors can spot the warning signs and invest in gold before it’s too late. But, what happens when crisis or disaster strikes without ample time to prepare and reallocate assets?
The federal government does not have the same level of control when it comes to gold as it does local currency. If the federal government enters into military conflict, local currency can quickly tank. The government must pay for these resources in some way, and often turn to printing more currency, thus driving up inflation. Consumer spending also decreases in times of military conflict, which can take a profound toll on the stock market. However, as mentioned in the section on inflation, gold prices are not susceptible to the same volatility as local currencies and the markets. For this reason, investors who wish to protect their life savings often turn to gold when they predict crisis may ensue and/or have a deep-rooted distrust in the central government.
Similarly, natural disasters also cause inflation. If a large portion of a commodity is destroyed in a natural disaster, the effects ripple throughout the economy. For example, if a flood destroys oil refineries, transportation costs will rise across the board. If a drought results in a drastic drop in cotton supply, costs of clothing and other products that use cotton will rise. This also can take a toll on the markets and lead investors to gold.
Unfortunately, it’s difficult to predict when crisis will unfold or when disaster may hit, which is why it is safer than not to consistently include gold as part of your investment portfolio. Local currency and other commodities may rise and fall, but for decades gold has remained a safe haven for investors.