You can’t read a financial website or turn on a business channel without the discussion whether the U.S. economy is likely to go into recession. Forecasters predict everything from soft landings to hard, and all options in between, with timing seemingly imminent, although most keep pushing it back slowly, quarter by quarter.
No one knows what the future holds and if and when a recession might occur. However, one can look at past recessions and analyze asset classes and their performances during such times in an attempt to position yourself if a recession does come to fruition. Recession aside, we are in an inflationary environment, and most believe that certain commodities, gold in particular, perform well in these times.
The talk of recession and buying gold go hand in hand. As usual, Warren Buffett was ahead of the latest gold bug, buying shares in the gold mining company Barrick Gold Corp in 2020. It begs the question, if Buffett is in, should you be as well?
Given the rising probability of a recession, gold seems like a good investment. According to the Recession Probability Composite Index, the chances of a recession are high and rising. So what does it mean for gold?
Let’s look at what affects the price of gold and see how it factored into gold prices during previous recessions. Between 1973 and 1975, the U.S. economy was in a 16-month-long recession. The S&P 500 index lost over -20% of its value, while the U.S. Treasury Index gained +10.1%. What did gold do? It gained +81.6%.
In 1980, a 6-month prolonged recession led to gold gaining +27.6%. Moreover, during the most recent economic recession, between 2007-2009, gold gained +25%, while the S&P 500 tanked -35.6%. There are several fundamental reasons why gold is valued in recessionary times.
- Gold is less affected by recessions. Because gold is in demand worldwide, a recession in the United States would not affect its global value. Gold would still be viewed as precious throughout the world.
- There is a fixed quantity of gold.
- Gold never decays or loses its structure. Unlike money that can be destroyed or stolen by hackers and cyber criminals online, gold in storage will always be there as a safe investment. Further, according to research at Duke University, its purchasing power remains essentially the same over time.
From the government’s perspective, the Fed sees a recession on the horizon. Recently released Federal Reserve minutes predict a “mild recession” later this year, confirming what many have suspected for some time. The announcement is just the latest in a series of bad economic news, including persistently high inflation, interest rate hikes, and bank failures.
To those who haven’t witnessed or may not remember what a recession looks like, it’s not pretty. In a recession, unemployment soars, purchasing power decreases, and the stock market plummets. Finding a safe place to store your money becomes significant.
Regional banks have lost a third of their value this year, while gold producers’ prices have soared.
The relationship between gold and the dollar must also be considered during a recession. We have witnessed the Fed injecting staggering amounts of liquidity into the markets since the pandemic, which leads to inflation that lowers the currency’s value.
This lowers investor confidence in the strength of the currency and increases demand for gold, which usually holds its value in weak economic environments. Gold prices in relation to fixed income securities are most affected by interest rates.
According to Piero Cingari, Forex, and Commodities Analyst at Capital.com, “When US real yields increase, gold’s value decreases and vice versa, because a higher real expected return on a safe asset like US Treasury bonds discourages investment demand in non-yielding assets, such as gold.”
If you’re buying into the theory that gold is a good diversified recessionary investment, there are a couple of ways to enter the market. Gold ETFs that are tied to the spot price of gold are probably the easiest and most liquid way to get a share of the gold market. With ETFs, you can also invest in one of 36 on the U.S. markets, each exclusively holding gold mining companies.
Holding physical gold is another way to go. You can buy physical gold in many ways, including via reputable gold dealers, private collectors, and pawn shops. The price you pay will depend on the purity of the gold in the bar or coin and the price of gold at that time.
Remember, there is no yield, so your gain will be strictly in price appreciation, which is taxed as a capital gain. You could also do as Buffett did and buy shares of a gold-producing company. You could profit if the price of gold rises and the company’s stock increases as its gold inventory becomes more valuable.
Talks of recession can be worrisome, but if you take steps to protect your money now, you can better ride out whatever happens.