Since the dawn of time, gold has been regarded as a sign of luxury and a literal synonym for the word “money”. The rare metal was used to make bars, coins, jewelry, and even statues. All of these items were meant to show the status and wealth of their owners. Surprisingly, the situation hasn’t changed much today.
In the modern world, gold is considered an excellent investment, especially during crises and geopolitical instability. Financial market players prefer gold to protect their funds from depreciation. But why?
In this article, we will examine how gold performs in a recession, inflation, or other unpleasant scenarios. Enjoy reading!
Gold’s Historical Performance During Recessions
When the economy goes into recession, stock markets fall, companies cut costs, and investors look for ways to protect their assets. At times like these, gold becomes a safe haven – an asset that retains its value even when the rest of the market crashes. But is gold really that reliable in times of economic turmoil?
History shows that gold does outperform the stock market in most recessions. Since 1973, the world has experienced eight recessions, and in six of them gold not only rose in value but also outperformed the S&P 500 index in terms of returns. The exceptions were 1981 and 1990. In the former, the U.S. Federal Reserve (Fed) was aggressively raising rates to fight inflation, which made bonds and the dollar more attractive than gold. In 1990, the economy faced a mild recession and central banks, on the contrary, sold gold, which limited its rise.
The chart below illustrates gold’s performance during past recessions, showing its resilience compared to the US500:
A line chart comparing gold prices and the US500 index during recessions
In other instances, however, gold proved its strength. For example, between the six months before the recession began and the six months after the recession ended, the average rise in gold prices was 28%, and its return outperformed the S&P 500 by 37%. The financial crisis of 2008 is an even better example. The Fed lowered interest rates from 4.75% in 2007 to 0% by 2009, which led to a sharp increase in the money supply. This spurred gold prices to rise by almost 50%.
Why does gold react like this to crises?
It’s all about the reaction of central banks. When the economy slows, regulators cut interest rates and increase the money supply to stimulate demand. But the more money in the system, the higher the risks of inflation, and investors start looking for assets that will help preserve their purchasing power. Gold becomes a natural choice as it is not dependent on government decisions or corporate profits.
However, it’s worth remembering that gold doesn’t always behave the same way. Sometimes, investors favor the U.S. dollar as a more stable asset, which limits the rise in gold prices. But in most cases, when the economy is unstable, demand for gold rises, making it a key tool for capital protection.
In the following sections, we will look at how gold behaves during periods of inflation and stagflation, and what economic mechanisms determine its long-term performance.
Factors Influencing Gold Prices During Recessions
To understand why gold is so in demand during recessionary periods, let’s break down a simple logical chain.
- Recession = economic downturn
When the economy slows down, companies reduce production, household incomes fall, and investors get nervous. The stock market tends to fall because corporate earnings expectations worsen. - Economic slowdown = lower interest rates
To support the economy, central banks (e.g. the Fed in the US) usually lower interest rates. This makes loans cheaper, encourages businesses to invest and consumers to spend. - Lower rates = weaker currency
When rates fall, investments in bonds and deposits become less profitable. At the same time, the money supply increases as banks issue more loans. All this weakens the national currency (e.g. the dollar). - Weakening currency = increased demand for gold
Investors start looking for assets that retain their value. Gold wins here for two reasons:
Firstly, it doesn’t depend on the decisions of central banks.
Secondly, it cannot be “printed” or artificially devalued. - Increase in demand for gold = increase in its price
When more people want to buy gold, its price naturally rises. Especially if supply remains limited (e.g. due to mining or supply difficulties).
Thus, it is the actions of central banks, market reactions and investor behavior that ultimately determine the rise in gold prices in times of economic turmoil.
Of course, there are exceptions – for example, if regulators actively fight the crisis by raising interest rates (as in 1981). But for the most part, gold has proven to be one of the most reliable assets during recessions.
Gold and Inflation
We’ve already discussed inflation, so let’s get into the specifics. Can gold really protect investors from the depreciation of money?
The answer is more complicated than just a yes or no. Historically, gold has performed impressively during times of high inflation. For example, in the 1970s, when U.S. inflation averaged 8.8% per year, gold rose in value by 35% annually. This makes sense: when the dollar loses purchasing power, investors look for assets that retain their value, and gold is one of the most obvious options. However, if we dig deeper, we see that gold doesn’t always behave so perfectly.
A key factor is central bank policy. In the 1980s, when Fed Chairman Paul Volcker dramatically raised interest rates to fight inflation, gold lost ground. The fact is that high rates make currencies stronger, and gold that doesn’t earn interest income becomes less attractive. A similar situation was seen in 2022. In response to rising inflation, the Fed embarked on one of the most aggressive rate hike cycles ever, which strengthened the dollar and brought gold down 20% from its March high.
It turns out gold does serve as a hedge against inflation, but with caveats. If central banks choose to tolerate inflation and don’t raise rates (as they did in the 1970s), gold rallies strongly. But if monetary policy becomes tighter, the precious metal may even become cheaper, especially against the US dollar. Interestingly, during periods of inflation, gold often rises against other currencies – for example, in 2022, it appreciated 14% against the Japanese yen, 8.6% against the pound sterling, and 4.3% against the euro.
Thus, gold can indeed be seen as a tool to protect against inflation, but its effectiveness depends on overall economic policy. If central banks do not intervene or delay action, gold performs strongly. But if regulators tighten monetary policy, gold may struggle.
Gold During Stagflation
Stagflation is a unique economic condition in which high inflation is combined with low economic growth and high unemployment. Unlike normal inflationary periods, when the economy overheats and wages and employment rise, the situation is different in stagflation: prices of goods and services continue to rise, but the economy remains weak, and businesses face falling profits.
A classic example of stagflation is the 1970s, when the U.S. economy faced soaring oil prices due to the OPEC embargo. Between 1973 and 1980, oil rose more than five times in price, from $25 to $144 per barrel in today’s money. This caused a massive slowdown in GDP growth and a spike in inflation, leading to a crisis that traditional methods of fighting inflation (raising interest rates) could not deal with without serious negative consequences for the economy.
During such periods, investors traditionally move away from stocks and bonds as corporate profits decline and markets become volatile. However, gold, historically perceived as a protective asset, has benefited in the face of economic uncertainty. In the 1970s, when stock markets were performing weakly, gold rose at a significant rate, reinforcing its role as a capital preservation tool.
Gold as a Hedge Against Economic Uncertainty
Gold has always been considered one of the most reliable assets in times of economic turmoil. Recessions, inflationary crises and periods of stagflation have invariably led to increased investor interest in this metal. The reason is simple: gold is not subject to devaluation like paper money, does not depend on corporate profits like stocks, and does not carry debt like bonds.
The main advantages of gold in times of crisis:
- Protection against inflation
- Stability in times of recession
- Reliable asset in times of stagflation
- Hedge against weakening currencies
- Independence from corporate and government risks
- High liquidity in times of crisis
- Long-term preservation of value
Historical data confirms that gold has shown steady growth during periods of economic instability. During recessions, it tends to outperform the stock market, and during periods of high inflation, it protects capital from depreciation. In times of stagflation, when prices rise, and business activity falls simultaneously, gold becomes one of the few assets that retain its value.
Today’s economy continues to face new challenges, from geopolitical instability to wildly fluctuating interest rates. Investors continue to view gold as a key risk hedge, providing capital protection in uncertainty.
Alternative Investments During Recessions
While gold has traditionally been considered a safe asset during volatile economic periods, it is not the only option for capital protection. Depending on the macroeconomic situation, investors may consider other instruments that either offer stability or provide growth even in times of crisis.
Let’s break down the main alternatives.
- Silver and other precious metals
Silver is similar to gold in many ways, but has a more pronounced industrial component. It also increases in value during inflationary periods, but its volatility is higher than that of gold. In addition to silver, protective assets include platinum and palladium, which can show growth depending on industrial demand.We recommend reading our recent articles on investing in silver and platinum. They will help you go deeper into the topic and expand your trading strategy. - Defensive Stocks
Some sectors of the economy are less susceptible to recessions. These are primarily: consumer staples companies (Procter & Gamble, Johnson & Johnson) or pharmaceutical companies (Pfizer, Merck) because demand for drugs is independent of the economic cycle.Also, utility companies (Duke Energy, NextEra Energy), which provide basic services that people continue to pay for even in a recession, may be useful. - Real estate (Real Estate)
Income-producing real estate (residential and commercial properties) can serve as a hedge against inflation, as rental rates often rise with inflation. However, in a recession, the real estate market can suffer, especially if interest rates rise, making loans more expensive. - Bonds, especially TIPS
Treasury Inflation-Protected Securities (TIPS) bonds issued by the U.S. government are automatically adjusted for inflation. This makes them one of the most reliable tools for preserving the purchasing power of capital in the face of rising prices. - Cryptocurrencies (Bitcoin, Ethereum)
Although cryptocurrencies are a relatively young asset class, some investors view bitcoin as digital gold. Bitcoin has often shown growth during periods of high inflation, but its high volatility makes it a less predictable tool for capital protection. - Commodities (Oil, gas, agricultural products)
Commodities such as oil, natural gas, and agricultural products can rise in value during inflation. Unlike gold, they have a direct use in the economy, which means their value is supported by demand. However, commodity markets are subject to sharp fluctuations due to politics, weather conditions, and global conflicts.
Should You Invest in Gold During a Recession?
After reviewing historical data, patterns and economic factors, we can draw a clear conclusion: gold does play an important role during periods of recessions, inflation and stagflation. However, is it worth investing in it during an economic downturn? The answer depends on your investment goals and strategy.
During recessions, gold usually shows gains, especially when central banks lower interest rates and increase the money supply. Its safe haven status makes it an attractive asset for investors seeking protection from market turmoil. During periods of high inflation, gold can retain the purchasing power of capital, but its behavior depends largely on the Federal Reserve’s reaction. If the Fed raises rates aggressively, gold can come under pressure.
It is important to realize that gold is more of a capital preservation tool than a way to increase capital quickly. Unlike stocks or real estate, gold does not generate returns in the form of dividends or rents. However, it remains a key element of a diversified portfolio, mitigating risk in times of economic instability.
