Gold Investment Over Recessions

gold investment during recessions

The US economy has been in a recession since Q1 of 2020, and there’s a good chance that it could remain in recession for months, if not years, to come. That has investors scrambling to preserve their existing assets and position themselves for what could be a very long bear market.

After two decades of unprecedented growth during the 1980s and 1990s, US investors became complacent, with many believing there was no way stock markets wouldn’t continue their meteoric rise. But the collapse of the dotcom bubble in 2000 and the collapse of the housing bubble in 2008 shattered the dreams and eviscerated the retirement accounts of millions of American investors.

Today we’re facing a similar situation, although it has the potential to be much worse for investors. GDP contracted more than any other time since the Great Depression, and nearly one-third of the US labor force was laid off at one point or another, with many millions still out of work. While stock markets are still flying high, we all know that a crash is coming. The only questions are, when will it come, and how will we prepare?

Many investors are already making moves to protect their assets by investing in gold. Gold investment over recessions is one of those things that many people just assume is natural, but for many investors it isn’t. In many cases they have to overcome ingrown biases against investing in gold before they make the decision to invest in gold. But once they make that decision, most never look back.

Why Do Investors Buy Gold During Recessions?

Recessions are normally characterized by at least two consecutive quarters of falling economic output. While recessions can be mild, recently recessions have been quite severe, with both economic output and stock markets suffering major losses.

During times of falling economic output, performance of most companies suffers. As unemployment rises, consumer spending drops. Lower economic output leads to falling business profits, and stock prices drop, impacting markets.

Throughout recessions, investors still have to have their assets invested. That’s particularly true for those who are saving for retirement and who may have significant amounts of assets tied up in tax-advantaged retirement accounts such as IRAs and 401(k)s. In many cases, the majority of those assets is invested in stock markets.

When stock markets crash, or are threatening to crash, investors look to move them into safer assets, those that won’t lose their value during a recession. Some of those assets include cash and gold. But investors with tax-advantaged accounts can’t just sell their assets and hold cash in most cases, otherwise they would incur thousands of dollars worth of potential tax liabilities. What to do?

Investors who are aware of all their options know that they have the ability to invest in a gold IRA. That allows them to roll over assets from existing tax-advantaged retirement accounts and invest them in gold. A gold IRA offers the same tax advantages as any other IRA, but with the additional benefit that it’s able to invest in physical gold coins and bars. That allows investors the ability to protect their assets from losing value due to a stock market crash, and the ability to gain in value since the price of gold tends to rise during recessions.

Historical Gold Prices During Recessions

When looking at gold prices during recessions, it’s probably most helpful to look at the gold price during the last two, the collapse of the dotcom bubble and the collapse of the housing bubble. The National Bureau of Economic Research (NBER) officially dated the beginning of the Great Recession as starting in December 2007, with the recession officially ending in June 2009. Gold concluded the first trading day of December 2007 at a price of $788.20, and ended the last trading day of June 2009 at a price of $926.60, a gain of 17.5%.

Gold’s performance was similar during the collapse of the dotcom bubble, with that recession officially beginning in March 2001 and ending in November 2001. Gold began March 2001 at a price of $265.60, and ended in November 2001 at a price of $273.60, a gain of 3%. That may not sound like much of an increase, but it’s far better than the performance of stocks in that same time frame, with the Dow Jones Industrial Average falling nearly 6%, from 10,450.14 to 9,851.56.

It is this kind of price performance that boosts gold investment over recessions. When faced with a suboptimal investment outlook, especially one in which stocks are at risk of severe losses, investors look to avoid those losses by changing their asset allocation and moving money into gold.

Why Gold Prices Go Up During a Recession

During a recession, there are very few assets that escape price declines. Cash is normally one of those, as it just maintains nominal value, although it loses value to inflation over the long term. Gold is another and is perhaps the most popular asset that investors choose to protect their portfolios during a recession.

As investors look to add gold to their investments during recessions, that increased demand drives prices up. And there are three major factors behind those price rises.

1. Fear and Uncertainty

Fear and uncertainty about the future are one of the primary motivating factors behind increased demand for gold. Once stock markets begin to slide or economies move into recession, no one knows how long that will last. Maybe the recession will be over in six months, or maybe it will last for years. Maybe markets will snap out of their correction and rebound, or maybe they will lose half their value.

No one knows for certain, and that’s why it may be wise to choose the certainty that gold brings.

2. Flight to Safety

No investor wants to lose money. Even though we all know that risk of loss is one of the things we have to deal with when investing, the reality of losing money is painful. That’s what many investors seek to avoid. While avoiding all losses is unachievable, especially during times of recession, rising gold investment over recessions is an indicator that investors are seeking safety and stability.

No one should put all their eggs in one basket, not even into gold. But by protecting up to 50% of your portfolio through an investment in gold, not only can you keep your portfolio safer by protecting it against huge losses, you can also continue to make great gains after the recession is over.

3. Investment Hedge

Not everyone wants to protect a sizable portion of their investment portfolio with gold. Some investors may only feel comfortable investing 10-25% of their portfolio in gold. They’re just looking to gold as a hedge, something to offer some short-term stability and asset protection, while they hope their other investments don’t lose too much money.

Those kinds of decisions are up to each individual investor to make. But as the number of investors buying gold as a hedge increases, so does the gold price.

Performance of Gold vs. Paper Assets During Recessions

We’ve already seen how gold performed against stock markets during the dotcom bubble-era recession, with gold gaining 3% while stocks lost 6%. But how did gold fare against bonds?

It can be difficult to assess bond performance, given the multiplicity of bonds out on the market. So let’s just take a look at one particular bond fund, the Vanguard Total Bond Market Index Fund (VBMFX), which is currently the second-largest bond fund in the world.

From March to November 2001, VBMFX rose 1.1%, from 10.14 to 10.26. Dividends added another 47.6 cents, for an overall return of 5.9%, outgaining gold.

The Great Recession was a different matter altogether. VBMFX started December 2007 at 10.21, and had fallen to 10.17 by the end of June 2009. Dividends contributed 74.1 cents in gains, bringing total return to 6.9%.

Stock markets, by contrast, fared abysmally, with the Dow Jones falling from 13,314.57 points at the close of the first trading day of December 2007 to 8,447 points at the end of June 2009, a drop of 36.6%. Gold’s 17.5% gain handily trounced both of those more conventional assets, attesting to its strength and resilience, and demonstrating why there’s always increasing gold investment over recessions.

What Happens to Gold Prices When the Stock Market Crashes?

Data comparing gold prices to paper assets when stock markets crash highlights even further the amazing performance of gold. The bear market in stocks following the dotcom bubble was a long one, with nearly two years between peak and trough. The Dow Jones peaked on January 14, 2000 at 11,722.98 points, and bottomed out on October 9, 2002 at 7,286.27 points, a fall of 37.8%.

VBMFX rose from 9.49 to 10.33, a gain of 8.9%. Dividends added another $1.735, for a total gain of 27.1%. Gold rose from $283.40 to $319.70, a gain of 12.8%.

Once again, the Great Recession changed everything, as the Dow peaked on October 9, 2007 at 14,164.53 points, falling to 6,547.05 points by March 9, 2009, for a total drop of 53.8%. VBMFX rose from 9.96 to 10.01. Dividends added another 68.1 cents of returns, for a total return of 7.3%. And gold rose from $736.70 to $921.50, a gain of 25.1%.

Gold’s performance during the Great Recession showed that conventional financial understanding and longstanding beliefs about relationships between and among assets have started to break down. It’s hard to believe today that bond funds actually once provided total returns greater than gold, but that was an era of higher interest rates. Mortgage rates averaged 8% in 2000, versus less than 4% today. And the federal funds rate peaked at 6.5% in 2000, versus zero today.

In an era of low interest rates, expect gold to continue outperforming stocks and bonds. Consider that the Dow Jones started 2020 at 28,868.80 points before falling over 10,000 points by late March. Even with a subsequent credit-fueled rebound, it’s still down for the year, closing at the time of writing at 28,248.44 points, for a loss of 2.1%.

VBMFX is up from 11.08 to 11.66, undoubtedly aided by lower interest rates. With an additional 15.4 cents of dividends, total returns are 6.6% for the year.

But gold, which started the year at $1,528.70, and which many analysts didn’t expect to top $1,600, is now at $1,967.40 at the end of August 2020, a gain of 28.7%. If you’re looking to protect your investment portfolio today against the likelihood of a stock market crash, which asset would you trust to do that?

When to Buy Gold During a Recession?

Looking at the numbers, the case for investing in gold seems obvious. The only question most investors have then is, when to buy gold? While that is a decision that individual investors will have to answer based on their financial ability and financial circumstances, there really isn’t ever a bad time to buy gold.

Certainly if you’ve been sitting on the fence and have watched gold climb in price this year, you might be thinking that you’ve missed out on the chance to make big gains by investing in gold.

But that’s not really true.

One of the great things about gold investment over recessions is the fact that gold continues climbing even after recessions are over and even after stock markets have recovered. Investors who stuck to gold after 2008 saw continued gains for years, and even today they still would have come out ahead by keeping a portion of their investments in gold rather than returning fully to stock markets.

But if you’re looking to buy gold, it’s always better to buy sooner rather than later. That’s especially true if you’re planning to do a 401(k) rollover into a gold IRA. With stock markets still at high levels, you can lock in gains that you’ve already made in stocks, while still being able to benefit from gold’s growth in the coming years. If you wait until after stock markets have started crashing, you risk losing thousands of dollars in potential investments.

Not only that, but gold supplies could be limited in the coming months due to COVID-related production bottlenecks at various mints. So if you wait too long, you may find that there isn’t as much gold available as you might have hoped.

Learn More About Investing In Physical Gold With Goldco

If you think now is the right time to buy gold, contact the experts at Goldco today. Their years of experience helping investors just like you benefit from investing in gold can put you on the path toward safeguarding your financial future. Don’t let this opportunity to put gold to work in your investment portfolio pass you by. Call Goldco today, and learn how to strengthen the safety and stability of your retirement savings.

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