Gold has been one of the most precious and beautiful yet scarce assets for centuries. Furthermore, this metal is seen as a smart investment since it adds stability and diversification to portfolios, hedges against inflation, and maintains its value.
Gold’s purchasing power remains the same over time, and there’s a fixed amount of this precious metal, making it a safeguard against times of economic uncertainty.
Also, the price of gold tends to rise during recessions as the value of the US dollar or other currencies declines.
After the pandemic and major political conflicts hit different countries’ economies, many wonder if following in the footsteps of numerous investors and buying gold is a good decision. Are you looking for the same answer? Find it here!
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Another question you should consider before making an investment decision is: “Why is gold valuable?
The price of gold rises during recessions for three different reasons. These are:
The yellow metal is a liquid commodity and can be easily converted to cash in many countries, unlike other assets, such as bonds and stocks. Therefore, during an economic downturn and when markets lose confidence, gold remains a beneficial asset.
Recessions affect gold less than other assets. Since this metal is in high demand around the world, a recession in the largest economy doesn’t affect its global value.
Gold doesn’t lose its structure or decay. This metal is still safer than other investments since it cannot be destroyed or stolen by hackers or cyber criminals if properly stored and insured.
This metal is scarce and difficult to mine, so its value hardly falls due to overproduction.
Also, as economies evolved, many countries began to use gold as backing for paper currencies, hoping to build confidence.
Although they don’t follow the gold standard today, such nations still have large gold reserves to withstand an economic collapse.
Gold Price Correlations
Besides understanding why this metal’s value remains the same throughout the years, it’s important to know how the price of gold reacts in response to different economic conditions.
Gold Value Correlation to Recessions
Over the years, this metal has had an inverse relationship with recessions. In other words, its prices tend to rise as investors buy gold as a safe haven asset.
In 2001, 2007, and 2020, the years of the last three historical recessions, gold’s prices rose against a lower S&P 500.
However, that fact doesn’t mean that the price of gold will always increase during recessions, as there was an exception in 1980. During that year’s recession, this metal’s value fell by 5%.
Gold Price Correlation to Inflation
Precious metals’ increases in value have helped cement gold’s position as a hedge against inflation and financial turmoil.
Physical gold becomes a more advantageous asset as investors buy it as a hedge against inflationary pressure and paper money loses value during periods of uncertainty.
Gold Value Correlation to Interest Rates
History has also shown that, just like during a recession, gold and interest rates have an inverse relationship.
When there are rising interest rates, gold prices also skyrocket. However, there may also be a negative correlation, as was the case between 2008 and 2015.
During this period, investors feared that the economy would completely collapse and began to buy gold. Consequently, its price and demand increased even though interest rates were low.
Gold Price Correlation to the Dollar
When the dollar weakens, gold prices often go up. It happens because this metal’s value is quoted in the US currency and foreign buyers can buy it cheaper in this scenario.
However, the inverse relationship is not perfect. Gold prices can rise when the dollar strengthens, as happened when investors bought gold as a safe haven asset amid fears of an economic downturn in 2019, or both assets could fall at the same time.
Gold Value Correlation to the Stock Market
Throughout history, gold has also shown a negative correlation with the stock market.
When the stock market collapsed in the past, gold prices skyrocketed. However, when it performed well, demand shifted to stocks and similar securities, sending the metal down in value.
However, in the early 2000s, gold and the stock market moved in tandem. Therefore, before deciding to purchase gold, it’s essential to analyze the entire economic picture and financial risk.
Who Can Benefit From Buying Precious Metals During Times of Recession?
Holding gold is a good idea for many investors, especially those concerned about the current market turmoil.
Precious metals can withstand cash flow problems, currency devaluations, and other economic issues better than other assets. Therefore, investment demand for gold increased in periods when many feared inflation and recession.
However, owning gold is a more common decision among seniors since young investors seek riskier investments. Those in their 20s or 30s still have decades to save for retirement, so they can tolerate more financial risk.
When Is a Good Time to Buy This Precious Metal?
When it seems that a recession is inevitable and charts highlight gold’s price movements on the positive path, it’s time to buy this metal.
These market conditions typically point out that gold prices will increase. However, if you buy this metal before the stock markets crash and there is rising demand, you’ll likely pay a lower price and have a solid return on investment.
FFurthermore, gold can help you diversify and stabilize your portfolio while enjoying lower financial risks, even when the economy seems to be faltering.
Final Thoughts
In recent years, the global economy has been rocked by several factors, including a two-year pandemic that wreaked havoc on many markets and operations, escalating political conflicts, industries reeling to stay afloat, and more.
Consequently, there are more and more consumers facing high inflation and investors dealing with dismal stock market returns.
Moreover, many economic experts have predicted that the US will soon face a recession. Therefore, those who want to protect their investments can purchase this metal.
History has shown that gold outperforms stocks and the dollar, especially after interest rate hikes. However, even though gold has proven to be a good asset during turbulent periods, it’s important to make an informed decision.
If you plan to put your hard-earned money in gold or other physical assets, don’t forget to seek comprehensive information or professional advice to protect your investment portfolio!
