When recessions occur, they threaten the investments people have made. In many cases, the value of stocks, real estate, and bonds take a huge hit. However, gold tends to behave differently during a recession. This article will take a closer look at gold’s performance during a recession, helping you determine if investing in it is a good idea.
The Ongoing Recession
A few years ago, America’s economy experienced a broad contraction that featured declines in manufacturing and employment. This downturn led the National Bureau of Economic Research to declare that America had entered another recession.
Though many economists predicted that the recession would end in late 2020 or at the beginning of 2021, the sudden COVID-19 pandemic that struck in early 2020 significantly affected the country’s economic recovery.
How Is This Recession Different?
Though there have been several recessions in America’s history, not all recessions are the same. For starters, different events can trigger a recession.
The Gulf War recession that began in July 1990 and ended in March 1991 was caused by an increase in loan interest rates that eventually slowed the economy. Ten years later, the dot.com recession was brought on by tech stock’s over-inflation, several accounting scandals, and the 9/11 terrorist attack.
The Great Recession that hit the country in December 2007, lasting to June 2009, was caused by factors like the subprime mortgage crisis, stock market crash, and dramatic cutbacks in bank-to-bank lending.
As for the ongoing recession, the public health crisis is one of the leading causes. In fact, considering the pandemic’s global impact, many view this recession as the worst economic disaster since the Great Depression.
How Does Gold Perform During a Recession?
Gold behaves differently. During a recession, the value of gold tends to increase. That’s why, due to the economic uncertainty brought on by a recession, more people turn to gold as a ‘safe’ investment option.
On top of that, its track record of independent performance makes it the smart option when it comes to preserving wealth in a shaky economy. Investors purchase gold as a way to protect themselves from inflation and the threat of an economic crisis.
An increase in gold prices is not unusual during a recession. Gold prices are actually a good indication of the actual state of America’s economic health. When the economy is healthy, options such as stocks, real estate, and bonds are viewed as more profitable investments, keeping gold prices low.
To give you a better picture of how it works, we shall look at a few historical examples of gold performance during past recessions, going as far back as the Great Depression.
Gold Prices During the Great Depression
During the Great Depression, the price of an ounce of gold went from $20.67 in 1929 to $35 in 1934. As the economy continued to worsen, the Federal Reserve tried to maintain the gold standard. This action technically contributed to the Great Depression, along with multiple bank failures and the 1929 stock market crash.
With gold viewed as a safety net, more people started hoarding it. Even after countries in Europe abandoned the gold standard, America still held on.
President Roosevelt had to sign the Gold Reserve Act that made owning gold in most forms illegal. People were forced to exchange their gold bullion, certificates, and coins for paper money at $20.67 per ounce. This setup helped the federal government to bolster its gold reserves.
Afterward, the government increased the price of an ounce of gold to $35. This increase made it possible for the government to print more paper money, enabling the economy to start growing again.
Gold Hit New High in September 2011
On the 2nd of September 2011, the persistent uncertainty over America’s debt ceiling, ongoing Eurozone debt crisis, and a weak jobs report caused the price of an ounce of gold to nearly double, going from $1,000 in 2009 to $1,873.73 in 2011.
In September 2009, the world had just come out of the 2008 financial crisis, and gold was trading close to its all-time high price of $1,032. While many thought that economic growth would recover as quickly as it did during previous recessions, others were tempted to capitalize on the dollar’s declining value and buy gold.
For those that gave in to the temptation, they saw significant returns. These returns happened because, thanks to the high foreclosure rates in America and the growing debt concerns in Europe, the economy did not recover as quickly as many hoped it would, keeping investors on edge.
Gold Prices and Brexit
Though this was not a recession, when Great Britain voted to exit the European Union in June 2016, the price of an ounce of gold increased by $100 in just six hours.
Brexit caused investors to panic, many of them turning to gold to protect themselves from a declining British pound and euro. At 4 pm on the 23rd of June, the gold price was $1,254.96. By midnight, the price has increased to $1,347.12 as a result of the Brexit vote.
The vote was also felt in America, with the stock market entering a stock market correction. Gold prices in the U.S rose as the Dow Jones averages fell.
Gold Reaches New Heights during the 2020 Recession
In the current ongoing recession, gold prices have reached new heights, surpassing the previous record in 2011. On the 23rd of July 2020, the price of an ounce of gold closed at $1,882.35. However, the increase in gold prices did not stop there.
With investors still concerned about the impact of the 2020 recession, August saw gold prices increase to an all-time high of $2,062.50 per ounce. Market analysts expect gold to continue posting solid gains because of fears of inflation, low U.S interest rates, and a weakened U.S. dollar.
Several Wall Street professionals remain bullish on gold, with some of them thinking it ‘not unreasonable’ for gold prices to reach the $3,000 or $4,000 mark as more and more people look for a ‘safe haven’ investment option.
Is Investing in Gold During a Recession a Good Idea?
Several industry professionals view investing in gold during a recession as a safe option. One of the main reasons for this is because gold has an intrinsic value. The value of an actual currency like the dollar depends on the country’s economic stability and strength. During instability, the value of the dollar often depreciates.
Gold is also preferred over the stock market because, in a recession, stocks fall as more companies start making less profit. As an investment, gold can preserve the value of assets and encourage investors looking to diversify out of riskier stock investments.
Gold would also become an attractive option if the country ends up with negative interest rates. This drop would happen if inflation becomes higher than nominal interest rates. When you have negative interest rates, the option of saving in a bank will become less attractive.
To top it all off, gold has historically performed well during shaky economic times. It did well during the Great Depression, the Second World War, the 1974 oil price shock, and the recessions in the 1980s and 2000s. That is impressive stability.
Factors To Keep in Mind
Though all these reasons make gold a desirable investment option during recessions, there are a few things that you should bear in mind.
For starters, though it is the uncertainty of the country’s economic stability that makes gold an attractive investment option, gold prices can still be volatile.
Recession, depreciating currencies, inflation, stock market crash, and banking collapse are not the only factors that would increase the price of gold. If you look closely, gold was still growing in value even during the boom period between 2001 and 2007.
Gold values would also increase if the national debt becomes too large or if investors lost confidence in the value of government bonds.
Though our focus in this article has been how a recession affects the price of gold, if you are thinking about investing in it, you should remember that other factors affect gold prices besides the nation’s economic cycle.
One of the main factors is demand. Currently, India has one of the most significant global demands for gold. Should demand decrease, gold prices would become lower. Another factor that affects gold prices is supply. If supply increases, gold prices will decrease–even if it is in the middle of a recession.
In most cases, as the economic conditions worsen, gold prices will rise. Therefore, if you are looking at gold prices, it is often best to review how well a particular country’s economy is doing. At the end of the day, gold is a commodity that, in small doses, promises to make an excellent diversifying element for your portfolio.
The key to making sound investment choices is to have reliable advice and information from a professional and credible source. If you would like to learn more about how gold performs and how to invest in it, you can find all the information you need at Learn About Gold.