Can Wine and Gold Point the Way to a Better Economy?
The diverging prices of wine and gold have led to speculation about whether luxury goods can really tell us anything about the state of the economy at large. According to the Liv-ex Fine Wine 100 Index, the wine gauge rose 5.9% this past year while gold bars slipped 17&. This year’s sale of gold is around 477.7 tons, almost more than the total from the past two years combined. Both items are luxury goods, yet their diverging prices in the midst of a recovering economy speaks volumes about the importance of supply and demand.
For centuries, gold has been used as a commodity-backed form of money that gave individual economies a resource to form a foundation. The price of gold has been climbing for the past 12 years, even during the Great Recession, so why is there an inverse relationship between the improving economy and the price of gold? The reason lies in the market.
As the Dow Jones and S&P break new highs everyday, investors are beginning to lose their zeal for gold. Although gold was thought to be the one constancy in a volatile market, the recent surges in the market have been too lucrative for many investors to stay away. Therefore the shift in the demand for gold leads to lower prices. The federal stimulus bill also shifted the tastes and preferences of consumers during the Great Recession. Investor confidence significantly deceased during the Great Recession in response to expected inflation from the stimulus bill. As the inflated dollar would decrease purchasing power, investors found little reason to invest in stocks and turned their attention to gold. However, as the inflation rate in the United States has remained constantly low, allaying the fears of a rapid spike in inflation, people have begun to divest from gold, causing speculation that the metal may drop below $1,000 in five years.
The demand for luxury goods like wine increases as the expected income of people in the economy increases as well. Although there is not a limitless ceiling for goods like wine, the current prices of gold and wine in the market bolster the economics behind the relationship between investor confidence, income, and the demand for luxury goods.