Gold and recession

The prices of gold, silver and precious metal bullion are uncorrelated to other investments. The yellow metal has historically held its value throughout the ages. So when other investments fall in value, gold is seen as a safe-haven investment. It is fair to say that in times of recession and depression, the price of gold usually rises - as demand is driven up by investors keen to diversify their portfolios and spread their risk.

What is a recession?

A recession is defined as a general decline in economic growth for two consecutive months, or a stagnation in growth for six months. Indicators of economic growth can include real gross domestic product, income, employment, manufacturing, and retail sales.

High unemployment is a feature of recessions and depressions. Public domain image courtesy of Wikipedia.

Since the Second World War there have been global recessions in 1975, 1982, 1991. More recently was the Financial Crash of 2008/09, which came in the wake of the 2006 United State's subprime mortgage crisis and stock market crash. The global pandemic from Covid-19 also saw widespread recessions in 2020 and 2021.

Recessions lasting a year or more are reclassified as depressions. World depressions occurred in 1640, 1837, the long depression of 1873-1896, and the Great Depression in the 1930s. This was possibly the most severe, running from 1929 to 1939 and culminating in the Second World War.

The effects of recession

During a recession everything falls in value, from currencies and stock markets, to real estate and property. In times of recession, money is typically withdrawn from investments like stocks and shares, but despite this, money itself also loses value.

The supply of gold is limited, but money is paper and paper can be printed. The problem is that this rapidly inflates the value of every product and service, known as hyperinflation. Many countries - in particularly Germany - learned this the hard way; with too much money-printing resulting in hyperinflation, and an inability to afford even basic goods ravaging the country in the mid 1920s.

This is why gold performs well in a crisis. Unlike cash, gold maintains its value. Scarcity and its precious metal nature have an enduring appeal. At the end of a recession, the person who bought gold is likely have reduced their losses, or even made money.

Positive or negative real interest rates are a major factor influencing the value of gold. Negative real interest rates occur when rates are running below the inflation rate, and this tends to happen during periods of depression. In turn, this then tends to increase the value of precious metals like gold, as saving accounts and other interest-earning investments all begin to lose money.

Does the gold price always go up in a recession?

The gold price has consistently advanced in times of recession, and while it isn't guaranteed, it is a strong likelihood. It is a particularly beneficial investment in times of economic hardship. Physical gold bullion investment can diversify a mixed portfolio, and it is a useful hedge against other investments. Unlike gold Exchange Traded Funds and gold mining stocks, physical gold is also free from counterparty control by governments and central banks.

Gold and silver during a recession

While gold does generally see its price rise during a recession as mentioned above, silver often performs differently. Silver sees a much greater use in industrial applications, such as electronics. With economic output falling during a recession this can see industrial demand for silver fall, and the price dropping accordingly.

It can however see an increase in demand from investment during these times. The silver price then can be quite volatile during a recession, at times falling on reduced industrial demand, then rising during other periods.