Gold during a recession can go up in value as investors flock to safe haven assets.
Recessions can lead to inflation and market instability. Investors who want to protect their portfolios look to assets like gold.
As demand for gold goes up it pushes the price of gold up too, making gold a popular hedge for investors.
Should I invest in gold during a recession?
Investors view gold as a safe haven when the stock market is volatile, making it a high performing asset during recessions.
During periods of economic uncertainty, people tend to pull their money out of riskier assets like stocks and move into less volatile assets like gold.
As demand for gold increases so does the price. During the 2008 recession, gold saw significant gains.
Before the recession, an ounce of gold was around $700 an ounce. By 2012, gold had jumped to more than $1,600 per ounce.
The same thing happened during the COVID-19 pandemic. Since 2020, gold has nearly doubled in price.
While gold can be a safe haven asset during economic downturns, it’s not the case for every recession. When the dollar is strong, gold prices tend to be low.
This happened in the early 1980s as the economy was coming out of a period of stagflation. Timing and macroeconomic context matter too.
If you’re a long-term investor and want to hedge your portfolio against market instability, diversifying in gold is one way to do that.
You can use gold to balance risk in your portfolio, but it shouldn’t replace your investment strategy entirely.
Is gold recession proof?
Gold isn’t completely recession proof, but it has a strong track record of holding its value during economic downturns. When markets decline and inflation rises, the dollar loses value.
Gold has historically been a good store of value so investors who want to protect against losses in their portfolio look to gold.
For example, during the 2008 recession, gold prices rose by 40% while the S&P 500 fell by 57%. In 2020, demand for gold surged once again as investors sought out gold.
Today, gold has reached all-time highs as fears of a recession rise.
Gold performance is often correlated with monetary policy. It can do well when the Federal Reserve cuts interest rates or expands the money supply.
As inflationary policies diminish the value of U.S. Dollars, gold becomes an appealing asset for investors looking to protect their wealth.
That being said, it’s important to recognize that gold isn’t guaranteed to go up in value during every recession.
In some downturns, especially when interest rates rise sharply or the dollar strengthens, gold gold can stagnate or even temporarily decline.
Investing in gold also comes with some trade-offs. It also doesn’t generate income like dividend stocks, interest-bearing bonds, or rental properties.
If you are looking for a source of cashflow to offset a job loss during a recession, gold probably isn’t going to be the best thing to invest in.
Gold also experiences short-term price fluctuations. That’s why it’s ideal for long-term investors. It tends to outperform other assets when the economy is under stress.
Gold can be part of a broader risk management strategy to mitigate the impact of a recession on your portfolio.
Why Gold is a Good Investment
Gold is a good investment because it’s one of very few assets that maintains its value over time.
Here are some of the key benefits of investing in gold and why investing in gold during a recession can be a smart move:
- Inflation hedge: Gold prices often rise with inflation. Because inflation erodes the value of a dollar, investing in gold can help protect your purchasing power over time.
- Safe haven asset: During times of uncertainty, gold is more stable than other assets. You can’t do much with stocks during war or bank crisis, but if you have gold almost everyone would take that as a form of payment.
- Tangible asset: Unlike stocks or bonds, gold is a physical asset you can hold. It’s not dependent on a financial institution and it doesn’t require the backing of a government.
- Provides liquidity: Gold is a globally recognized method of payment. It’s easy to buy or sell, making it a flexible option to include in your portfolio.
- Portfolio diversification: Gold can be more stable during recessions, reducing the overall risk in your portfolio. Even if the stock market goes down, gold prices won’t necessarily fall with it.
If your goal is to safeguard your wealth, gold can offer a sense of security and stability that you won’t find with other assets like stocks.
Whether you’re preparing for retirement or just trying to reduce your exposure to risk, gold is an asset that can help you accomplish those goals.
Why Gold is a Bad Investment
While gold can help protect your wealth during recessions, it comes with some drawbacks you’ll want to be aware of before adding it to your portfolio.
Here are a few things you should consider about investing in gold:
- Doesn’t generate income: If your investment strategy relies on income generation or you want a passive income stream in case you lose your job, gold isn’t going to be a good investment. Unlike dividend stocks, bonds, or real estate, gold won’t produce any supplemental income.
- Price volatility: Even though gold is a stable long-term investment, gold can have dramatic price swings in the short-term. Unpredictable macroeconomic effects can affect gold prices, exposing you to losses.
- Storage and insurance costs: Physical gold has to be stored securely. If you want to include your gold in an IRA, your account will need to be managed by a custodian and your gold physically stored at a depository. This will add annual fees to managing your investment, eating at your returns.
- Limited long-term growth: While gold is a stable long-term investment, it doesn’t post the highest returns. If your goal is to grow your portfolio, gold won’t provide as much growth as investing in stocks in the S&P 500.
- Selling costs: You’ll need to find a buyer to buy your gold once you’re ready to liquidate it. Some dealers may take a commission, reducing the overall value of your goal.
Gold can be a bad investment if you’re looking for a steady stream of income or want to aggressively grow your portfolio.
It’s ideal as a supplemental investment to hedge against risk rather than being a core part of your investment strategy.
Best Ways to Invest in Gold During a Recession
During a recession, you’ll want to invest in gold in a way that aligns with your overall financial strategy. While physically buying gold is the easiest way to hedge against inflation, it isn’t the right option for everyone.
These are a few different ways you can invest in gold:
- Physical gold coins and bars: Buying physical gold bullion provides direct ownership and eliminates counterparty risk. If you want to manage your portfolio directly or want quick access to gold to liquidate during an emergency, physical coins or bars are a good option.
- Gold IRAs: A self-directed gold IRA is an option to invest in gold for retirement by holding physical gold in a tax-advantaged account. This can help you diversify your retirement savings but keep in mind you’ll need to pay for a third-party to manage your investments and the types of gold you can include in an IRA must be approved by the IRS.
- Gold ETFs: Gold ETFs offer exposure to gold prices but they are traded like stocks. You won’t need to physically store gold and they can be easily liquidated like a stock or a bond.
- Gold mining stocks: Investing in companies that mine gold can offer exposure to rising gold prices. If you want to protect your portfolio while also growing it, this can be an option to consider. There are some additional risks tied to company performance that you’ll want to consider first before you do so.
Digital gold platforms: Newer platforms like OneGold allow you to buy, sell, and store gold digitally. This gives you fractional ownership of gold, reduces the risk of storing it, and can be easier to liquidate than taking a coin to a dealer.
There isn’t one best way to invest in gold. Each option has its own pros and cons, but they all provide access to gold during economic downturns.
Choose whichever option fits your investment strategy and comfort level.
Quick Recap
Gold has a long history of performing well during recessions. It can protect your portfolio from market volatility and inflation, helping you preserve your wealth.
While gold is a safe haven asset, it isn’t completely risk free. If you’re considering investing in gold during a recession, research the different ways to invest in gold and choose the option that aligns with your goals.
Read through a gold IRA guide and review trusted gold dealers to learn more about how you can incorporate gold into your investment strategy.