Investing in Gold During Recession

Readers Question: In this period of (future) recession, is gold a safe investment?

Gold is traditionally seen as a safe investment, especially during a time of financial uncertainty, high inflation, depreciating exchange rates and economic recession

• The main reason is that Gold has an intrinsic value. A currency like the dollar or Pound Sterling can depreciate in value – the value of the Pound sterling depends on the strength and stability of the UK economy. For example, hyperinflation can wipe away the value of your savings e.g. Germany 1923, Zimbabwe 2008. During this kind of crisis Gold makes a very good investment.
• During a recession, gold is seen as a better investment than say the stock market. Stocks will fall as companies make less profit. Gold is seen as a safe investment for preserving value of assets. This encourages speculative buying of gold as investors diversify out of other riskier investments.
• Gold will also become attractive if we have negative real interest rates. i.e. inflation higher than nominal interest rates. With negative real interest rates, saving in a bank becomes less attractive and gold become more attractive. (At moment we do have negative real interest rates in UK inflation 5% is higher than interest rates 4.5%)
• Gold did well in Great Depression and Second World War – both crisis of different sorts

However, Bear in Mind

• It is inflation and depreciating currencies which really make Gold an attractive investment.
• I feel the price of gold increased this year because of the prospect of a banking collapse, rather than recession.
• If you look at the graph you can see how volatile the price of gold can be. There is no obvious link between recession and increase in price of gold. For example, the price of gold was increasing during boom period of 01-07
• Gold would also increase in value if people lost confidence in the value of Government bonds. e.g. if US national debt become too large, there would be a rush into gold.

Forecasts for 2009

Although Gold has fallen from its March peak of $1000, I will stick my neck out and say the price of gold will rise from $800 to above $1000 by the end of 2009