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When the Economy Goes Down, Gold Goes Up

Jul 02, 2019 | Fred Abadi |

When the Economy Goes Down, Gold Goes Up

For thousands of years, gold has served not only as currency but also as a successful preserver of wealth. It has witnessed the fall of empires and survived wars, financial crises, and hyperinflation. When other assets fail, investing in physical gold may safeguard your wealth. That’s why it’s a solid recession investment strategy.

When the economy falls into recession, most investors see their stock portfolios drop too. But if you understand how assets correlate and the simple rules you need to follow so you can diversify your portfolio to protect and grow it, you can avoid and eliminate your losses altogether.

By owning uncorrelated assets, you reduce your risk of losses. Such assets may include bonds, equity investments, and stable dividend-paying stocks, but neither of these effectively hedge against large market declines.

One asset stands out: gold. The precious metal is one of the most uncorrelated assets to stocks—in fact, history shows that gold’s correlation to stocks and other investments drops further during a recession, as seen in the chart below.

When assets have a correlation of 1, they always move in the same direction, while -1 means they move in completely opposite directions. As we can see, gold has a negative correlation with the S&P 500, both during periods of appreciation and during recessions.

Long term, this means gold and stocks will always move in opposite directions, and during recessions gold will typically offset losses incurred by other assets. Since 1965, we have seen seven recessions. In the chart below, see how gold has performed during each of them.

During five of the seven recessions, gold increased—in three of them, it even jumped by double digits, including during the Great Recession. Gold is a safe-haven asset, and during periods with economic turbulence, uncertainty, or recession, investors seek out gold to protect their wealth. The two recessions during which gold prices went down occurred when interest rates were historically high. Remember Paul Volcker’s 22% rate?

It’s simple: to preserve the value of your investments and/or retirement savings, your recession investment strategy should include adding gold to your portfolio. And you should do so before the next recession begins, so you can fully benefit from the precious metal’s strong ability to protect your wealth.

Don’t invest in physical gold in case a recession comes but because it comes. No one knows when the next recession sets in, but the odds of a recession coming at one point or another are 100%, and the signs are clear that it’s not far into the future. 

You don’t need to be a fortune teller to see why it’s wise to include gold in your portfolio—history clearly shows recessions are inevitable, and gold can shield the rest of your portfolio from heavy losses. If you own a meaningful amount of precious metals, you stand a much greater chance at doing well in the next recession than people who don’t own precious metals. Just after the 2008 recession, the price of gold went up 3-fold in three years, proving yet again its value as financial insurance.

From a timing perspective, now is the perfect time to insure your portfolio with gold. Once the reckless monetary and fiscal policies of our government lead us into the next recession, investors will turn towards gold as a recession investment strategy. That means the precious metal will become much more expensive to acquire.

When demand for gold really grows, it may become difficult to acquire the precious metal. We saw that during the Great Recession. Gold buyers had to pay upwards of a 15% premium over the spot price to invest in physical gold and 20% or higher in premium for silver. Shipping was delayed up to four months, and during some days suppliers even advised dealers not to sell because they couldn’t promise the orders could be filled.

Once a serious crisis hits the global economy, gold and silver may be unavailable no matter the price. Then, it will be too late to protect your portfolio and wealth with precious metals, threatening your standard of living. Insurance is effective when it’s purchased before the accident. You will not be able to insure your portfolio once the damage is done.