Recessions and Gold Prices | Historical Price Charts and Analysis
At a Glance:
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- Gold is commonly considered a recession-proof investment.
- Historical data shows that gold does tend to perform well during recessions.
- This trend might not always be the case; this page analyzes the relationship between recessions and gold prices.
Recessions and Gold Prices – Is Gold Recession-Proof?
Gold bullion has been a highly recommended physical investment for decades. Part of gold’s appeal is its exceptional performance during recession. Compared to other assets, gold often holds its value well during periods of economic crisis. In fact, gold can actually increase in value when markets take a dive. This trend has led some advisors and gold stackers to dub the metal “recession-proof.” A recession-proof asset is an investment that is not generally negatively affected by recession or financial crisis.
Is gold really recession-proof? Available data suggests that gold has historically been a safe asset during periods of economic recession. Gold’s status as a recession-proof commodity is not set in stone. Data concerning gold’s price performance during recessions is relatively new, since gold only became an investment-grade asset less than one century ago.
It is healthy for investors to be skeptical when they hear any sweeping claim about an investment’s potential. Gold has demonstrated a history of recession-proof price performance, but available data is still very limited.
Gold as a Safe Haven Asset
Gold is a safe haven asset. Putting money into safe haven assets is one way that investors can diversify their portfolios. Traditional assets tend to be negatively affected by recession, high unemployment rates, and inflation. Safe haven assets like gold are usually non-correlated, which means that they don’t follow the same trends you’ll see in traditional investing markets.
What is a Safe Haven Asset – And What Makes Gold One?
Safe haven assets are considered good investments during periods of inflation or global economic uncertainty. When you invest in a safe haven asset, your goal is to buy investments that are not subject to the same correlations that drive traditional assets down during troubling financial climates.
Gold is a safe haven asset for a couple of reasons. First, gold is a physical asset with intrinsic value. Because gold bullion is scarce and useful, it can never become completely worthless, unlike stocks. Second, gold bullion has a long history of use as a ‘fallback’ currency. When global fiat (paper) currencies become worthless, gold’s intrinsic value allows it to function as a medium of exchange. For these reasons, gold is the asset investors turn toward when markets take a dive.
Safe Haven Assets as Inflation Shields
Safe haven assets serve one main purpose in nearly every portfolio – they shield investors from inflation. When inflation rates are high, the value of currencies like the United States Dollar decline. Even when traditional stocks perform well, high inflation can eat into the value of your investment portfolio.
Gold is an inflation shield because it is considered unaffected by inflation. Gold has value, even when the value of a fiat currency collapses completely. During some periods, gold’s intrinsic value outpaces inflation rates by a significant margin. Financial analysts usually recommend limiting gold contributions to 5-10% of the average investment portfolio.
Is Gold Inflation-Proof?
Gold is generally considered inflation-proof. In a general sense, gold is inflation-proof because the metal itself cannot deflate in value. An ounce of gold is always worth an ounce of gold. If the value of the United States Dollar decreases, then that means it takes more dollars to buy an ounce of gold – not the other way around.
Does this mean gold is a perfect investment? Absolutely not. While gold is unaffected by inflation in a general sense, gold’s value can fluctuate wildly because of the metal’s short term volatility.
Recessions and Gold Prices | Historical Charts
Gold is a safe haven asset, but is it really recession-proof? To evaluate this common claim made by gold investors and dealers, we will need to take a look at historical data. Let’s take a look at this chart, which explains the correlation between recessions and gold prices since 1970.
For this analysis, we used the recession dates determined by the National Bureau of Economic Research (NBER). Because gold prices remained static until the Nixon Shock in 1971, this analysis paid no attention to recessions before 1970. The large gray bars represent six big recessions experienced by the United States since 1970:
- 1973-1975
- 1980
- 1990-1991
- 2001
- 2007-2009
- 2020-2021
In five of the six major recessions we studied, gold prices increased as the strength of the general economy decreased. A particularly significant boom in gold’s spot price coincided with the 2008 recession, suggesting that the severity of a recession plays a role in gold’s price performance. The 2008 recession was the largest in recent American history, and it also resulted in the most explosive growth in gold prices.
From 1990-1991, gold prices decreased modestly amid recession. Aside from this one outlier, the available data suggests that gold prices either increase or remain unchanged during periods of economic downturn and recession.
Analysis: Does Gold Thrive in Recessions?
The data suggests that gold does thrive during economic recession. However, we recommend that investors remain cautious before assuming that this trend will always hold true. Not all experts agree that gold is recession-proof. In particular, the limited availability of data prevents economists from finding consensus in the claim that gold is a tried-and-true recession-proof asset.
Gold’s status as an investment asset did not become prominent until the 1971 Nixon Shock, when President Richard Nixon eliminated the last vestiges of the United States gold standard. This means that we really only have about 50 years of reliable data to track gold’s price performance during recession. Recessions are not a common event, so it’s even harder to make sweeping, data-supported statements about gold’s recession price performance.
Still, 50 years of historical price and economic data paints a clear picture of gold’s prospects amid economic downturn. For the most part, the safe haven asset tends to either remain static or increase in value while the U.S. battles the telltale signs of recession.
Why Gold is Recession-Proof – 3 Big Reasons
Gold is often considered recession proof. There are three main reasons why gold remains a premier asset for investors bracing for recession. Gold’s recession-proof status is due primarily to its intrinsic value, non-correlation, and its role as a buffer against inflation.
Intrinsic Value
Gold coins and bars have intrinsic value. This means that they are valued because of what they are, rather than just how much people want them. Stocks, bonds, and other traditional assets have little intrinsic value. Instead, these investments are valued almost exclusively because of demand. Gold, on the other hand, is always valuable because of its scarcity and usefulness.
Since gold has intrinsic value, it performs well in environments where demand for traditional assets is minimal. Investors who fear a collapse of foundational economic means of exchange like the United States Dollar flock to gold. This is because gold’s value is not dependent on the performance of the United States Dollar.
During recession, gold is a hot commodity because investors know that it will always have some sort of value. If the entire stock market crashed tomorrow, most investors would lose everything. Investors who put money into safe haven assets like gold, however, would still have money because of gold’s intrinsic value.
Non-Correlation
Gold performs particularly well during recession because it is a non-correlated asset. Non-correlated assets are assets that do not move in-tandem with traditional economic stimuli. To better understand non-correlation, we will need to take a look at traditionally correlated assets, such as stocks. Stock values are highly correlated with general national economic performance. When unemployment is high and inflation rates increase, stocks tend to decrease in value.
Non-correlated assets like gold are not linked to these external factors in the same way that traditional investments are. When unemployment and inflation rates increase, gold can actually become more valuable. Gold isn’t the only non-correlated asset, but its non-correlation helps to make it an ideal recession-proof commodity. During a recession, traditional stocks decrease in value because their key correlations turn sour. Gold doesn’t have this same correlation to traditional indicators, so it performs well in times of economic strife.
Inflation Buffer
Finally, gold is often considered recession-proof because it is a buffer against inflation. Investors like to add gold to their portfolios because gold’s value is unaffected by the strength of paper currencies like the United States Dollar. Since gold is an effective inflation buffer, it tends to perform well during recessions, which often feature rampant inflation and unemployment.
Investor speculation also plays a role in gold’s recession-proof status. Even if gold is sometimes influenced by inflation, the popular perception that gold is an inflation buffer leads investors to put money into the metal when economic signals turn sour.
Will Gold Always Be Recession-Proof?
While data suggests that gold is recession-proof, there is little reason to believe that this trend will hold forever. We caution investors to actively avoid falling victim to the “appeal to tradition” fallacy. Just because gold has been recession-proof for the past five decades does not mean that it will always be recession-proof.
However, the popular notion that gold is resistant to economic recession could be a good reason to invest in the precious metal. Investors believe that gold performs well during recession, so they tend to buy gold coins and bars when they feel the economy is heading for a downturn.
When investor speculation increases demand for a commodity, its price is likely to go up. This is absolutely true with gold. When rumors circulate that the United States is heading for a recession, gold purchases tend to skyrocket – and prices increase in response. This puts our analysis in a tricky position. On one hand, it is not clear that gold will always be the recession-proof asset we have seen over the past 50 years.
But on the other hand, it looks like gold’s public perception as a recession-proof asset is here to stay. Our advice? Ride the wave of investor speculation so that you can buy low and – hopefully – sell high.
Data Limitations For Gold Price Trends
The reason experts are divided on gold’s correlation with traditional economic indicators is primarily due to data limitations. Unlike other assets, the public trade of gold as an investment is relatively new. Until the Nixon Shock in 1971, gold’s price was stabilized by its role in backing global currencies like the United States Dollar.
To make confident claims about how gold will perform during a given economic cycle, we would need quite a bit more data. For now, data limitations make it difficult to definitively say that gold is likely to perform a certain way in any predefined financial market/climate.
Experts Analyze: Is Gold Too Good to be True?
Experts disagree on whether or not gold is as good of a recession hedge as some investors believe. Morgan Stanley argues that gold is an extremely effective method of diversifying. Because gold is “less affected by economic declines” than other assets, Morgan Stanley claims it can be an efficient way to protect investor assets against financial crises.
The Commodity Futures Trading Commission offers a different perspective. Researchers from the CFTC find that precious metals can be “highly volatile” and that historical performance data is a poor “predictor of future returns.”
These two perspectives may seem completely different, but investors can find a safe middle ground between the two extreme takes on gold’s investment potential. Gold has historically performed well during recession, but data on the metal’s price-action is too fresh to be completely effective as a predictor of future returns.
Should You Buy Gold Before Recession?
Buying gold before a financial recession is considered a good idea. It is unclear how well gold might perform during the next U.S. recession. However, it remains clear that investors will likely buy more gold in the lead-up to economic downturn. This happened in 2020, when gold prices climbed amid the COVID-19 recession.
Ultimately, we recommend cautious research before investors put money into any new commodity. The evidence suggests that gold is indeed recession-proof, but future data trends could potentially cast doubt on this widely-held theory.
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About The Author
Michael Roets
Michael Roets is a writer and journalist for Hero Bullion. His work explores precious metals news, guides, and commentary.