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What Affects Gold Prices During a Recession?

Catherine Tramell
Catherine Tramell

Last updated 25. august 2021

Even if you are remotely familiar with stocks and general finance, you’d know gold holds its own during an economic crisis. It’s the asset that sails the boats of most investors who’ve been otherwise battered by the dismal performance of the shares and other paper-based investments they have to their credit.

Economic downturn

Gold, on the other hand, rides the tides a lot more calmly and efficiently. But what is it that makes gold so resilient during financially testing times? How do gold prices go up during a stock market crash? What is about gold price during recession going up?

To get the answers to all of the above questions and more, keep reading.

What Affects Gold Prices?

Gold prices do not fluctuate as fervently as stocks. But the metal does have its teeter-totter moments. What gives?

  • Industry Speculation

    Speculation is arguably the biggest reason gold prices are not static. World markets speculate the frequently changing policies and actions of central banks and governments and behave accordingly. Their actions influence the sentiments of investors toward the precious metal.

    The dramatic gold price rise is usually fuelled by central bank purchases, monetary policy, interest rates, world economics, geopolitics, etc. In 2014, for instance, the Federal Reserve declared it would wrap up the stimulus program it had rolled out because of the 2008 subprime mortgage crisis. Pretty soon after the announcement, gold prices dropped.

  • Inflation

    When the dollar goes through a decline, gold prices rise. When inflation is at a record high, prices of commodities go up.

    Gold prices increase as well, invariably setting a new record. Because the weakening currency causes people to lose their confidence in paper money, there’s suddenly more demand for the precious metal as it’s the de facto safe haven.

    People start to accumulate their wealth as gold instead of as cash. Many investors buy more gold to form a hedge against inflation.

Why Gold Prices During a Recession Go Up?

Gold prices have historically gone up during a recession – be it during the early 1990s recession, the Great Recession (2007-2009), the economic crisis that immediately followed the dot-com crash, etc.

People lose confidence in their currency during a period of financial instability. Counterparty risks in stocks, bonds, and other paper assets tend to go up. Investors, as a result, seek shelter in gold due to its inherent value.

There are multiple reasons why investors flock toward gold when the markets are down. The precious metal is not dependent on any entity or the revenues and profits of a business to stay afloat. It cannot default or go defunct. Most importantly, central banks cannot print or create gold at a whim and cause manipulation.

All of the above attributes of gold cause more investors to buy gold and increase the gold price in the process. Even investors who traditionally had less gold in their portfolio feel a greater urge to buy more gold. Quite a few procure a troy ounce of gold for increased purchasing power.

Do Prices of Other Precious Metals/Stones Go Up as Much?

Gold isn’t the only commodity to possess inherent value. Silver and diamond, for instance, are intrinsically valuable too. Gold and silver are pretty complementary. But, there are a few niggles.

Silver is “Working Class”

Though silver is nowhere as expensive as gold, it’s still a precious metal. Contrary to general perceptions, the relative affordability of the metal isn’t the real reason people do not buy silver in the hordes when the economy is in shambles and are buying gold instead.

Besides being a valuable metal, silver is also an industrial good. The metal gets frequently used in the manufacturing of various goods – such as batteries, glass coatings, semiconductors, photographic equipment, medicine, LED chips, RFID chips, etc.

Because an economic crisis implies a financial slowdown or lesser industrial activity, the demand for silver isn’t as much during the period, or there’s more silver available for purchase than the markets would fancy.

Diamonds are Not “Streamlined”

Diamonds do not benefit from a strong resale value as gold, silver, and other precious metals do. And there are reasons for that.

For starters, diamond is advertised to lure in buyers and generate traction. Gold doesn’t require marketing pushes to sell them more due to its cultural significance in different parts of the world. Diamond has no such social importance. It, therefore, needs to be marketed heavily.

Also, there are different diamond types, and not every variety trends or is hot at a given point in time in the markets. Some of the standard diamond varieties include:

  • White diamonds
  • Yellow diamonds
  • Champagne diamonds
  • Green diamonds
  • Purple diamonds

Besides the different hues, the various types have their unique cuts, shapes, sizes, etc., that may or may not be desired by all. As a result, the demand surrounding the various types of diamonds is fluctuating or not easily predictable.

Gold is the De Facto Metal for Diversification

Besides the above, portfolio diversification is another reason gold is a great asset to invest in.

Not keeping all eggs in a single basket is the cardinal investment rule. During any economic crisis, the need to diversify assets gains significantly more momentum. If things go real bad or there’s an urgent need for liquid money, you can easily sell off gold.

And since gold is the de facto asset to invest in or because silver and platinum do not come to a traditional investor’s mind first whenever they think of holding money in precious metal, the demand for gold during recession goes up, and along with it, the price.

Gold Prices are Not Necessarily Correlated to Recession

As alluded to earlier, gold prices rose during the Great Recession. And that has been the case during pretty much every other economic slump. But gold is not guaranteed to go up in value during a financial crisis. On the other hand, real estate will always crash (albeit temporarily) when the stock market collapses.

Before the subprime mortgage crisis drove the price of gold, the yellow metal was already booming. The gold price was close to $1,000 an ounce (from $270 an ounce during the late 1990s) until 2008. The price of gold fell below $800 right before the financial crisis hit and bounced back, and rose in negative correlation to the stock market.

The economic crisis officially came to an end in 2009 (second quarter). Gold prices did not, however, experience a descent immediately or even after some time. The price of gold continued to rise further even with the economy completely recovering or the stock market rallying. Gold’s price topped in 2011 at around $1,900.

Gold entered its bear phase only in 2013 – a solid four years after the mortgage crisis. Since then, gold has seen its share of ups and downs. The current price (as of July 12, 2021) of gold is $1,810.

Long story short, do not assume gold prices will always be high during a recession and low when the economy is doing well. Apply market research principles before concluding. In other words, demand can be great for gold even when investors are highly confident about the performance of their paper-based assets.

Conclusion

Gold’s reputation as a secure wealth haven is proven and would stay unperturbed for the foreseeable future. That, however, doesn’t imply the precious metal is entirely immune to external forces. But, because it’s a lot less vulnerable than stocks and most other assets or investment vehicles, gold holds its own.

There’s never the wrong time to invest in gold – except during periods when the prices are very high. If you are interested in investing in gold, put your money in bullion (gold coins and bars). In other words, start a gold IRA. You can also buy 24K jewelry if you’d like to wear the precious metal.

If you have a legitimate interest in learning about a gold IRA, click here to know everything about the retirement planning arrangement.

FAQs

1. How much gold should I buy in the lead-up to an economic crisis?

Recession or not, it’s always advisable to ensure gold doesn’t account for more than 10% of your total investments. 15% should be the maximum stretch. The yellow metal doesn’t appreciate like stocks and bonds do and doesn’t pay dividends as well. Therefore, don’t lock in too much of your funds in the metal and stunt your economic growth.

2. Should you buy gold stocks instead of the physical metal?

Gold can be bought in the metal, as a paper-based asset, through a gold IRA arrangement (bullion coins and bars), etc. If you’d like to invest in gold and receive dividends, investing in gold mining and ETFs is recommended. If you are saving for retirement, a gold IRA makes a lot more sense. And if you do invest in shares of gold miners, you may break the aforementioned 15% gold investment threshold.

3. When is the best time to buy/invest in gold?

Since gold prices are at their peak when the stock markets retreat, it’s highly advised to buy the precious metal when the economy is strong or when the stock market is rising. Not just gold, but pretty much all precious metals are at their weakest when the stock market is booming.