Precious Metals
Author Peter C. Earle Ph.D. - AIER
At the moment, economists and investors are wrestling with three competing narratives about the trajectory of the U.S. economy. The first holds that the nation already slipped into a mild recession in 2024. This view draws on indicators such as cooling labor markets, declining job openings, sluggish consumer spending, and modest industrial contraction. Academic economists Pascal Michaillat and Emmanuel Saez, for instance, published work suggesting that, based on vacancy-unemployment dynamics, the U.S. may have entered recession as early as March 2024. Those who subscribe to this camp argue that while the downturn has not been severe, it is consistent with the traditional markers of a shallow recession.
The second perspective is more cautious. Many Wall Street strategists—from J.P. Morgan to Bank of America—concede that the odds of recession have risen but stop short of declaring that one has begun. They highlight restrictive Federal Reserve policy, tariff uncertainty, and slowing global demand as headwinds. Yet they also stress that household balance sheets remain relatively resilient and that corporate earnings, while uneven, have not collapsed. To these analysts, the economy may yet avoid outright contraction but risks a slowdown that leaves GDP growth near zero.
The third view is distinctly more optimistic. Some economists argue that the U.S. remains on track for a soft landing, in which inflation gradually recedes without tipping the economy into a serious downturn. This perspective leans on evidence such as continued consumer spending on services, still-positive (if slowing) real GDP prints, and a modest pickup in productivity. According to this camp, the adjustment away from pandemic-era distortions is painful but not catastrophic, and the worst fears of a recession are overstated.
Regardless of which narrative proves correct, one fact is unmistakable: gold has done well recently. Since late 2023, bullion prices have surged to successive record highs, propelled by a combination of factors. Elevated geopolitical risks—from conflicts in Eastern Europe to tensions in the South China Sea—have increased demand for perceived safe-haven assets. Simultaneously, investors seeking protection from sticky inflation and uncertain monetary policy have turned toward gold as a hedge. Central bank purchases, particularly from emerging markets wary of over-reliance on the U.S. dollar, have further supported demand. The result has been a strong rally that stands in stark contrast to the mixed performance of equities and bonds. To understand why this dynamic recurs, it helps to look back at the performance of gold across earlier recessions and economic slumps.
The Great Depression of the 1930s represents the most severe economic downturn in modern history. Triggered by the 1929 stock market crash, it was marked by collapsing output, deflation, and widespread unemployment. Gold’s behavior during this period was unique because of the prevailing gold standard. Under that system, the dollar was directly convertible into a fixed quantity of gold. Rather than fluctuating in price, gold functioned as the anchor of the monetary system itself.
Yet the Depression revealed the strains of such a regime. As banks failed and capital fled, governments sought to preserve gold reserves by tightening monetary conditions—policies that exacerbated deflation and unemployment. In the United States, President Roosevelt suspended the gold standard in 1933 and subsequently devalued the dollar against gold. That act effectively raised the official dollar price of gold from $20.67 to $35 per ounce. While private ownership of bullion was restricted domestically, the devaluation symbolized gold’s capacity to reassert value during crises. Holders of gold abroad, and later investors once restrictions eased, benefited from its role as a store of purchasing power in an environment of collapsing credit.
The 1970s provide a contrasting case. The U.S. formally ended the Bretton Woods system in 1971, severing the link between the dollar and gold. This freed gold to trade at market prices. Almost immediately, the decade became synonymous with stagflation—a toxic mix of stagnant growth and high inflation, spurred by oil shocks, expansive fiscal policy, and monetary mismanagement.
Gold thrived in this environment. Rising consumer prices eroded real returns on bonds, while equity markets struggled under volatility and declining valuations. Investors turned to bullion as an inflation hedge, driving its price from around $35 an ounce in the early 1970s to over $800 by 1980. The surge reflected both the diminished credibility of monetary policy and the desire for a tangible asset immune to the debasement of paper money. The experience cemented gold’s reputation as a refuge during inflationary slumps, even as it also underscored its volatility—prices fell sharply in the early 1980s once the Federal Reserve under Paul Volcker raised interest rates decisively.
The recessions of 1980 and 1981–82, both tied to the Federal Reserve’s aggressive disinflationary campaign, illustrate a more complex relationship between gold and downturns. Initially, gold prices remained elevated, benefiting from residual inflation fears. But as Volcker’s policies succeeded in curbing price growth and restoring confidence in the dollar, gold’s allure diminished. Prices dropped by more than half between 1980 and 1985. The lesson here is that while gold shines in the face of inflationary uncertainty, its appeal wanes when monetary stability is credibly restored—even if growth remains weak in the short run.
The mild recession of 1990–91 coincided with the aftermath of the savings and loan crisis and the Gulf War. Gold rose modestly, reflecting heightened geopolitical tensions, but the move was not dramatic. Inflation was already trending downward, and the Federal Reserve responded with relatively swift rate cuts. Equities soon rebounded, limiting gold’s upside. This episode underscores that gold’s strongest rallies usually require a confluence of economic weakness and either inflationary risk or geopolitical turmoil. A simple slowdown, absent those catalysts, may not be sufficient.
The bursting of the dot-com bubble in 2000–2001 produced a mild recession and a significant equity bear market. Gold, however, only began its sustained ascent after 2001, as the Federal Reserve lowered interest rates aggressively and the dollar weakened. The early 2000s marked the start of a multi-year bull market in bullion, fueled by the combination of low real yields, geopolitical instability following the September 11 attacks, and a growing sense that U.S. deficits and debt accumulation were undermining the dollar’s primacy. Here, gold prospered not merely as a recession hedge, but as an alternative store of value amid structural imbalances.
The 2007–2009 financial crisis demonstrated gold’s dual role as both a hedge and a source of liquidity. In the initial panic of late 2008, gold prices actually dipped as investors scrambled to raise cash by selling any liquid asset. But as the crisis deepened, central banks unleashed unprecedented monetary easing. Fears of inflation and dollar debasement revived demand for gold, pushing prices higher through the crisis and into the following decade. By 2011, gold hit new highs above $1,800 an ounce. The episode reinforced gold’s long-standing appeal in systemic crises where faith in financial institutions and fiat money erodes.
The COVID-19 pandemic recession of 2020 was highly unusual: a sharp, policy-induced contraction followed by massive fiscal and monetary stimulus. Gold initially surged as uncertainty peaked, breaching $2,000 an ounce by mid-2020. Yet once vaccines emerged and economic recovery gained traction, gold prices retreated, though they remained elevated by historical standards. The episode highlights gold’s role as a crisis hedge: it flourishes when uncertainty is maximal but can lose momentum once clarity returns, even if growth remains uneven.
Taken together, these episodes reveal several patterns:
Thus, gold’s performance is not mechanically tied to recessions. It thrives not simply when growth slows, but when confidence in money, markets, or political stability erodes.
The present moment, with economists divided between recession calls, soft-landing hopes, and everything in between, has once again highlighted gold’s perennial role as a barometer of unease. Its recent rally suggests that investors, even if uncertain about whether the U.S. has technically entered recession, are hedging against a combination of inflation persistence, geopolitical turmoil, and policy missteps. The lesson from history is clear: gold is not merely a hedge against downturns; it is a hedge against distrust—distrust in central banks, in governments, in fiat money itself.
Whether the U.S. economy is already in a shallow recession, headed toward one, or set to skirt the worst, gold’s resilience underscores the importance of maintaining assets outside the conventional financial system. For the educated investor, the key takeaway is that while recessions vary in depth and character, gold’s historical record reveals why it remains a unique form of insurance. Its value lies not in guaranteeing prosperity, but in preserving confidence when confidence elsewhere is in short supply.
About the author: Peter C. Earle, Ph.D, is the Director of Economics and Economic Freedom and a Senior Research Fellow who joined AIER in 2018. He holds a Ph.D in Economics from l’Universite d’Angers, an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.
Prior to joining AIER, Dr. Earle spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area as well as engaging in extensive consulting within the cryptocurrency and gaming sectors. His research focuses on financial markets, monetary policy, macroeconomic forecasting, and problems in economic measurement. He has been quoted by the Wall Street Journal, the Financial Times, Barron’s, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications.
Disclaimer: All opinions expressed by the author are the author’s opinions and do not reflect the opinions of Goldco. The author’s opinions are based on the author’s personal experience, education and information the author considers reliable. Goldco does not warrant that the information contained herein is complete or accurate, and it should not be relied upon as such.
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