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How Gold Performs During Recessions

John Galt

Updated: July 12, 2022

gold long term
Editor’s Note:

EDITOR'S NOTE: With the threat of a recession looming on the horizon, it makes sense to consult data on how gold has historically performed during recessions. What’s clear at first glance is that the correlations are questionable. But what’s also clear and perhaps striking is that gold has been steadily rising throughout. Let’s put this into context. Gold has been rising steadily along with the economy as measured by the S&P 500 index. In fact, global GDP, in the period illustrated in the chart below, has been rising. But so has government debt. When the gold standard was abolished in 1971, central bank monetary intervention took an even more active if not aggressive role in managing the economy. But if you look at Total Factor Productivity (TFP), “real production” has been stagnant. What you’re seeing are bubbles in asset prices fueled by the Fed, fiscal spending, and a significant rise in national debt. Among the two figures on the chart, it’s arguable that gold is the only asset of “real” value that has appreciated not as a direct result of intervention but as a measure of the fallacy that intervention was wrought on all other dollar-based assets. So, whether our economy falls into a deep recession or not, the question of “real economic value” stands. And gold’s answer to that has always been clear and unwavering. For it was and still is the true measure of monetary value.

how gold performs during recessions

Source: Elements

Does Gold’s Value Increase During Recessions?

Gold has been traditionally considered a safe-haven asset, with many investors turning to the yellow metal during recessions and times of turmoil.

So, how does gold hold up when the economy tumbles?

The above graphic uses data from Macrotrends to highlight gold’s price movements during recessions and compares it to changes in the S&P 500.

Gold vs. the S&P 500 in Historical Recessions

Gold’s value comes from its scarcity as a precious metal, in addition to its long history as a stable medium of exchange.

Gold also has a low-to-negative correlation with the stock market, suggesting that changes in the price of gold are largely independent of how stocks are faring. As a result, gold is considered an effective diversification tool for investors who want to hedge their bets.

But has gold helped investors weather recessionary storms in the past?

Since 1971, when the gold standard was abandoned, gold has largely seen positive price changes during recessions. And in the last three recessions since 2000, its performance has countered that of the S&P 500. While the increases in value haven’t been dramatic, they help cement gold’s position as a hedge against financial turmoil and as a store of value.

For example, when the stock market collapsed in 2007, investment demand for gold increased as investors looked for a safer option. Between 2007 and 2011, gold’s price more than doubled. Similarly, with fear and uncertainty at a high during the COVID-19 pandemic, gold-backed exchange-traded funds saw record inflows, and the price of gold reached an all-time high.

However, while gold’s price tends to rise during times of economic turmoil, it often stagnates or falls when the economy is healthy and investors seek riskier investments. As a result, it’s important for investors to consider the overall macroeconomic and geopolitical environment when looking at gold.

Gold’s Time to Shine in 2022?

The global economy has been shaking with turbulence in 2022, with consumers facing high inflation and investors seeing dismal stock market returns.

While these market conditions typically point towards rising demand for gold, that hasn’t been the case so far this year, with prices down 2% year-to-date. This is partly because of rising interest rates, which increase the opportunity cost of holding gold as investors forgo the interest income they could earn from saving accounts or bonds.

But in fact, history shows that gold often outperforms U.S. stocks and the dollar following interest rate hikes, after underperforming in the lead-up to rate hikes. Additionally, high inflation is eroding the purchasing power of each dollar, incentivizing investment in a tangible asset like gold and other hard assets.

With geopolitical uncertainty at a high and the U.S. consumer sentiment at decade-lows, will gold prove its value as a safe-haven asset in 2022?

Originally published by Elements.

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