A donkey walks into a bar. “Where’s the horse?” asks the barman. “Recession,” says the donkey.
Not funny, we know. But neither recession is a funny thing. People are losing jobs, while incomes are declining. In macroeconomic terms, recession is a significant decline in general economic activity in a country. In several countries, the rule of thumb is that two consecutive quarters of negative economic growth as measured by the GDP constitute a recession, but in the U.S., the recession is determined by the NBER, which uses more frequently reported monthly data – such as, , , etc. – to declare a recession.
There are many explanations of recession. For some economists, they results from exogenous negative shocks to the economy, while for others they are the inevitable consequences of the precedent artificial booms. Anyhow, hardly anyone likes that part of the. With the possible exception of , of course.
Recession and Gold
Indeed, the yellow metal does not flourish in prosperity, when there is excessive optimism and confidence in the Fed and the U.S. economy. However, gold thrives when economies are struggling. Gold is a good investment during recessions due to its role as a . As one can see in the chart below, gold gained during most of the several last recessions, including the (the timing of recessions is only approximately reflected by the rectangles).
Chart 1: Gold prices (London 10:30 a.m. fixing) during recessions (indicated by the rectangles) from January 1970 to January 2015
The yellow metal has– this is why it is a good and it often shines when other asset classes suffer. For example, the yellow metal generally performed better than stocks during recessions, standing out as having the best combination of return and risk. Even during the 2008 crash, gold finished the year with a 5 percent gain (although it initially lost due to the rush to raise liquidity at any cost). However, investors should be aware that gold prices do not perform in the same way during different busts. Gold usually perform best in contractions accompanied by high uncertainty and a weak U.S. dollar, high and accelerating inflation, or low and declining real interest rates. Given that the has already inverted, there are high odds of the U.S. recession in the near future. Although remains subdued, the outbreak of recession with low should support the gold prices.
We encourage you to learn more about the gold market – not only about not only about the link between recession and gold, but also how to successfully useas an investment and how to profitably trade it. Great way to start is to sign up for our today. It’s free and if you don’t like it, you can easily unsubscribe. Back