The above graphic uses data fromMacrotrendsto highlight gold’s price movements during recessions and compares it to changes in the S&P 500.
Gold vs. the S&P 500 in historical recessions
Gold’s value comes from itsscarcityas a precious metal, in addition to its long history as a stable medium of exchange.
Gold also has a low-to-negative correlation with the stock market, suggesting that changes in the price of gold are largely independent of how stocks are faring. As a result, gold is considered an effective diversification tool for investors who want to hedge their bets.
But has gold helped investors weather recessionary storms in the past?
Since 1971, when the gold standard was abandoned, gold has largely seen positive price changes during recessions. And in the last three recessions since 2000, its performance has countered that of the S&P 500. While the increases in value haven’t been dramatic, they help cement gold’s position as a hedge against financial turmoil and as astore of value.
For example, when the stock market collapsed in 2007, investment demand for gold increased as investors looked for a safer option. Between 2007 and 2011, gold’s price more than doubled. Similarly, with fear and uncertainty at a high during the COVID-19 pandemic, gold-backed exchange-traded funds sawrecord inflows, and the price of gold reached an all-time high.
However, while gold’s price tends to rise during times of economic turmoil, it often stagnates or falls when the economy is healthy and investors seek riskier investments. As a result, it’s important for investors to consider the overall macroeconomic and geopolitical environment when looking at gold.
Gold’s time to shine in 2022?
The global economy has been shaking with turbulence in 2022, with consumers facing high inflation and investors seeing dismal stock market returns.
While these market conditions typically point towards rising demand for gold, that hasn’t been the case so far this year, with prices down 2% year-to-date. This is partly because of rising interest rates, which increase the opportunity cost of holding gold as investors forgo the interest income they could earn from saving accounts or bonds.
But in fact, history shows that gold oftenoutperformsU.S. stocks and the dollar following interest rate hikes, after underperforming in the lead-up to rate hikes. Additionally, high inflation iseroding the purchasing powerof each dollar, incentivizing investment in a tangible asset like gold and other hard assets.
With geopolitical uncertainty at a high and the U.S. consumer sentiment atdecade-lows, will gold prove its value as a safe-haven asset in 2022?
Since 1971, when the gold standard was abandoned, gold has largely seen positive price changes during recessions. And in the last three recessions since 2000, its performance has countered that of the S&P 500.
Due to its reputation for being a safe-haven asset, gold tends to perform well during a recession. For example, when the stock market collapsed in 2007, investment demand for gold spiked and continued to rise, and gold doubled in value between 2007 and 2011.
The reason gold tends to be resilient during stock market crashes is that the two are negatively correlated. In other words, when one goes up, the other tends to go down. This makes sense when you think about it. Stocks benefit from economic growth and stability while gold benefits from economic distress and crisis.
A recent J.P. Morgan report attributes gold's surging prices in late 2023 to a confluence of factors, including increased purchases from central banks, rising concerns over geopolitical conflicts in the Middle East and Eastern Europe, inflation and anticipated Federal Reserve interest rate cuts.
That said, gold's value can dip from time to time, but over the long term, the value of gold has historically increased. In fact, gold experienced an average annual growth rate of 11.2% over the past 20 years, according to Oxford Gold Group.
Some investors may want to consider gold stocks, such as mining companies. However, when the market goes down it can also drag down precious metals mining stocks as well, depending on the company. For instance, the VanEck Gold Miners ETF , which holds a basket of mining stocks plunged during the 2008 recession.
Many experts say that just before a recession is the best time to invest in gold. There are several reasons for this. For one, its value tends to hold steady or, often, even increase during these down periods. That's because investors flock to the safety of gold, which drives up its price — and your returns.
Fluctuations in financial markets can also cause volatility in the price of gold. However, because so many investors purchase gold as a safe-haven asset, its value remains relatively constant. Long-term investments in the precious metal are unlikely to experience losses.
When the supply of gold is low and demand is high, the price will rise. Conversely, when the supply of gold is high and demand is low, the price will fall. Additionally, other factors like interest rates, inflation, currency value, geopolitical events, and economic conditions can have an impact on gold prices.
However, in Q3 and Q4, when the financial crisis really started to become systemic, gold traded in a lower range, mainly between $700 and $900 an ounce.
Con: It doesn't give you passive income or steady returns
Unlike some investments that yield passive income (e.g., rental properties, some stocks and bonds), physical gold doesn't provide passive income, dividends or interest. You will only earn once you sell your gold.
The gold price will be stably growing in the long term. The historical high was set at $2431.42 on 2024-04-12. Most expert analysts predict that the XAUUSD rate will rise. The precious metal is expected to update its historical peak: the rate may exceed $2,300 in 2024.
Gold is trading above $2,000 per ounce in early 2024. Analysts expect that even later in the year, gold prices may remain above $2,000 per ounce, reaching new historical highs. Among the factors favouring this are geopolitical uncertainty, the likely weakening of the U.S. dollar, and potential interest rate cuts.
The bottom line. There's no way to know exactly how much an ounce of gold might cost 10 years from now. However, most experts predict that the price of the precious metal will be significantly higher in 2034 than it is today.
What will gold be worth in 5 years? Two Jakarta-based commodity analysts forecast that the price of gold could reach as high as $3,000 per ounce in the next five years. While they remain bullish, they cautioned that many factors could affect the price of gold within this timeframe.
Gold has long been regarded as a natural hedge against inflation, so it can be a smart move to invest in the precious metal when inflation rates are high. That's because, as the real value of regular currency diminishes, the demand for gold tends to increase, propelling its price upward.
The VanEck Gold Miners exchange-traded fund has dropped 16% since mid-April 2022. The main driver is that analysts' expectations for 2024 earnings per share have also dropped 16% since mid-April 2022, even as the price of the commodity has been rising, according to FactSet.
Therefore, gold has historically been a good investment option during times when the prices of goods and services are rising. As the U.S. dollar loses value, investors often turn to gold, which subsequently increases the precious metal's demand and value.
To put this into perspective, we visualized the performance of gold alongside the S&P 500. See the table below for performance figures as of April 12, 2024. Over the five-year period, gold has climbed an impressive 81.65%, outpacing even the S&P 500.
Introduction: My name is Annamae Dooley, I am a witty, quaint, lovely, clever, rich, sparkling, powerful person who loves writing and wants to share my knowledge and understanding with you.
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