The performance of gold in recessions is due to several factors, such as its liquidity, consistent demand, and market perception. Gold has long been seen as a reliable store of wealth during economic downturns. Although gold has lost value in one of the last five economic recessions, compared to the losses incurred by the S&P 500, it is a highly effective store of wealth.
Historic Performance of Gold in Recessions
| Year | S&P 500 Change | Gold Change |
| 1973 | -13.1% | +87% |
| 1980 | +6.6% | -5.1% |
| 1981 | +5.8% | +1.6% |
| 1990 | +5.4% | +0.1% |
| 2001 | -1.8% | +5.0% |
| 2007-2008 | -37.4% | +16.3% |
These examples show an even split between gold and the S&P 500 during recessions, with both assets demonstrating resistance to market volatility. However, the advances made by gold in those recessions vastly outweigh the growth made by the S&P 500. Gold made the greatest gains in times of economic upheaval. By a wide margin, the S&P 500 lost more value in those recessions than gold lost during recessions where it lost value.
Gold as a Store of Value
Many investors and financial advisors consider gold to be an excellent store of value and a hedge against inflated markets. As inflation erodes the value of fiat currency, the value of gold remains relatively stable and even demonstrates growth.
Recession as a Catalyst
One reason gold performs so well in recessions is the Federal government’s response. During economic hardships, the central bank has added liquidity to the market and cut interest rates, reducing the costs of holding gold. Furthermore, other assets like stocks and bonds become less desirable as a result of low anticipated returns, which leads more investors to gold.
As more cash is added to the system, gold benefits in a second respect. Increased cash flow saturation lowers a currency’s value. Reduced investor confidence can lead to increased gold demand, which results in greater gold value.
Liquidity
The high liquidity of gold allows investors to quickly convert it into cash when needed. In times of economic hardship and uncertainty, liquid assets like gold provide a safety net since they can sell for cash without delay. This liquidity is strengthened by increased demand for gold in times of recession.
Demand
The demand for gold contributes significantly to its performance during recessions. Portfolio diversification is a strategy employed by many during financial crises, and gold’s low correlation to other assets makes it an ideal candidate. Furthermore, when uncertainty rises, investors begin shifting their investments away from risky stocks toward safe-haven assets to protect their wealth.
All of this contributes to increased demand for gold products, resulting in greater performance.
Market Perception
The market perception of gold itself contributes to its performance during recessions. When we are outside in a torrential downpour, we seek refuge from storms. The damage caused by rain is often minor but the favorable conditions for lightning and hail may give most people cause to find shelter as the clouds overhead darken.
Similarly, when skepticism and uncertainty infect a market, we seek shelter from the uncertainty that gathers. Financial news and media coverage play a pivotal role in shaping the market perception, and positive sentiments around gold boost its performance.
