There was a global recession in 1974, 1980-81, 1991-92 and 2007.
Readers Question: In this period of 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. In a recession, typically stocks will fall as companies make less profit. By contrast, gold is seen as a safe investment for preserving the 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 the moment we do have negative real interest rates in UK inflation 5% is higher than interest rates 4.5%)
- Gold did well in the Great Depression, 1974 oil price shock, the Second World War and early 1980s recession.
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 a recession and an increase in the price of gold. For example, the price of gold was increasing during the 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 becomes too large, there would be a rush into gold.
- Many other factors affect the price of gold apart from the economic cycle. One factor is simply the demand for gold. One of the biggest global demand for gold comes from India (demand for jewellery). If there is a recession in India, then this is likely to hit the demand for gold and lead to lower prices.
- It also depends on supply. If the supply of gold increased, then the price may fall – even in a recession.