A recession may not sound like a great time to be in the markets, but the truth is that they provide plenty of potential opportunity – if you know the right strategies to pursue. Historical analysis shows some assets typically thrive relative to other assets during periods of economic slowdown.
Gold is one such asset. Trading gold during a recession is a tried-and-true strategy that offers myriad benefits for traders seeking to execute hedges, protect their wealth from inflation or diversify their holdings. With that in mind, let’s take a more in-depth look at what you need to know about gold and recession.
What is a Recession?
A recession is a sustained period of weak or negative economic growth that is usually accompanied by declines in trade and industrial output. Historically, a decline in Gross Domestic Product (GDP) for two successive quarters has been the signal that a recession has started. GDP measures the market value of all goods and services within a national economy that are produced within a specific time Recessions are sometimes triggered by high interest rates or created by a dramatic shock to a national economy. This can come from a pandemic, natural disaster, terrorist attacks or the creation and subsequent popping of large asset bubbles.
What Are the Effects of a Recession?
Recessions lead to higher unemployment, reduced wages and incomes and lost opportunities. They often cause companies to reduce their labor forces to control costs, which becomes important at a time of lower consumer spending (lower consumer spending is often a result of higher unemployment, so there is a chicken-and-egg element to these two factors).
As consumers feel less confident about the economy, they spend less. Bankruptcies, defaults and foreclosures then often climb. Consumers and businesses may be unable to meet their debt obligations, creating a spiral of additional problems. Recessions are also associated with a decline in values for real estate, stocks, bonds and other asset classes.
Should You Invest in Gold During a Recession?
While this is ultimately a personal decision, one glance at historical performance levels shows that gold has routinely outperformed stock during periods of significant economic downturn. In addition to the prospect of delivering higher returns, gold also has a variety of attributes that make it a valuable alternative investment.
What Are the Benefits of Investing in Gold During a Recession?
To understand why gold is beneficial, let’s first talk about why gold is different. Gold has been valued by humans for thousands of years for its beauty. It has a long record of being used as a source of wealth and a means of exchange. This makes people confident that gold will retain its value. Gold also has intrinsic value because its properties (beauty, malleability, low corrosion) makes it useful in both cultural and industrial settings.
As a result, gold has typically acted as a hedge against inflation and currency devaluation. While the purchasing power of the US dollar has declined over time, the purchasing power of gold generally remains steady or increases. Gold therefore provides a way to protect against the rapid erosion or purchasing power/wealth during periods of inflation, which are often associated with recessions. Gold also provides a smart tactic for diversifying an investment or trading portfolio during periods of recession. By including an asset that outperforms stocks, traders and investors can theoretically sharply minimize downside risk during times of poor market performance. The easy accessibility of gold ETFs and futures also ensure that traders/investors have a liquid mechanism by which to trade gold.
Does the Value of Gold Always Go Up During a Recession?
Historical analysis shows the value of gold has increased in 3 of 4 recessions. Yet the most painful recessions often see the greatest outperformance by gold. The recession of 1980-1982 saw a 27% decline in the S&P 500, while gold jumped an astounding 46% during the same period. During the dot.com crash of 2000 to 2002, the S&P 500 dropped a staggering 49%, while gold jumped 12%. Similar disparities have been seen during Black Monday in 1987, during the Global Financial Crisis in 2008 and in several other periods of massive stock market decline.
Why Does the Value of Gold Increase During a Recession?
Put very simply, investors gravitate to gold during recessions because it is a safe harbor. If investors are worried about currencies being devalued via loose monetary policy, gold provides an alternative option. If investors are worried about their purchasing power disappearing through inflation, gold provides an alternative option. Traders who are more focused on their portfolio performance can also simply view historical charts and see that gold, more often than not, has been a smart asset to invest in during recessions or other periods of economic turmoil.
How Can RJO Futures Help Investing in Gold During a Recession?
Every day, RJO Futures gives investors the guidance and tools they need to execute gold investment opportunities. If current economic trends have piqued your interest in gold, we encourage you to contact RJO for more information about how we can do the same for you. RJO Futures has a world-class team of commodity experts to guide you, a market-leading trading platform and all the tools you need to execute.
