Gold has been an object of fascination for human beings for thousands of years. In times of economic downturn, it should also be an object of intense interest for investors.
Gold is beautiful, functional and limited in supply. Its properties make it a natural hedge against inflation and currency devaluation. When the macro environment looks risky, gold often looks like the safest harbor.
Let’s take a look at the history of gold, the various ways in which you can invest in gold and the surprising numbers that show why gold so often dramatically outperforms equities during periods of recession or economic uncertainty.
What Are the Basics of Investing in Gold?
Gold is a chemical element that is known for being highly malleable and much-prized for its beauty by humans dating back to our earliest civilizations. Gold is also attractive because it is resistant to corrosion (gold coins exist dating back to ancient civilizations) and has been widely available to miners through the centuries. Interestingly, all gold on earth was created by the collisions of stars and supernovas occurring before the formation of our solar system.
Given its value to humans, gold has been a source of wealth and used as a mechanism for wealth exchange for thousands of years. At the inception of the republic, US dollars were backed by gold. This “gold standard” helped reassure the public that the paper money circulated by the government could be trusted in times of economic turmoil.
However, with the creation of the Federal Reserve in 1913 and passage of the Gold Reserve Act in 1934 (which gave the government ownership of all circulating gold coins, restricted personal ownership of gold and banned new minting of coins), the US began moving on from the idea of gold-backed currency, eventually departing from the gold standard in 1971.
The end of the gold standard was accompanied by a surge of interest in gold as an investable asset class, after the US government relaxed restrictions on the ownership of physical gold associated with the Gold Reserve Act.This development occurred just a few years after the introduction of the South African Krugerrand, the first gold coin minted specifically for investment purposes.
Today, purchasing gold bars or gold coins is the most direct way to invest in gold. Yet there are drawbacks: These markets may be illiquid and physical gold must be stored securely. Gold ETFs and mutual funds that track the price of gold are an alternative to physical holdings. Some brokers also offer access to derivatives markets allowing you to invest in gold futures and options.
Whichever option you choose, gold offers numerous benefits for investors.
What Are the Benefits of Investing in Gold?
Gold offers numerous benefits for investors. First, it has historically been considered a hedge against inflation. An ounce of gold in 1970 was worth about $35. Today that same ounce is worth nearly $1,700. While the value of an ounce of gold has increased dramatically over 50 years, the purchasing power of $35 has declined dramatically over 50 years. Today, you would need nearly $250 to purchase the same goods and services $35 purchased in 1970.
Fiat currency is backed by the full faith and credit of governments and the value of state currencies such as the dollar can be influenced by the monetary policies those governments undertake. Gold is a limited resource with intrinsic value, which makes it attractive as a safe harbor when investors are worried about currency devaluation.
Given these properties, gold can also help investors take a diversified approach to their portfolios. As a store of value that is resistant to many of the risks that can devalue equities, gold as a diversification agent makes sense in many cases.
Investors seeking some of the benefits of gold combined with the benefits of equities may wish to consider purchasing stocks in gold mining companies or other gold industry entities. These stocks often pay dividends, yet may not be subject to the same economic forces that can impact stocks in other sectors.
What Are the Effects of a Recession on Gold?
Investors who wish to learn how to invest in gold during a recession have some good news: In roughly 3 out of every 4 recessions, the value of gold has sharply increased.
During the Global Financial Crisis of 2007-2009, the value of the S&P 500 fell by more than 50%, while the value of gold increased 25%. The stock market saw a dramatic 33% drop after Black Monday in 1987. Gold increased in value by 6%. From 1976 to 1978, when the US experienced an energy crisis and inflation shocks, gold increased by 53% while the S&P 500 was down by nearly 20%.
As you can see, gold often performs dramatically better than other assets during the most severe economic downturns. Additionally, because gold is a global asset, it may not be as affected by economic problems within a single country or bloc.
Given the numbers associated with gold’s performance during the worst economic downturns, there is little argument that investors seeking an opportunity to control downside risk and potentially gain significant returns have few better options, historically, than gold.
How RJ O’Brien Can Help Invest in Gold During a Recession
If you’re convinced that gold is the right asset for you, finding the right investment partner is your critical next step.
You deserve a partner that can provide guidance from a world-class team of commodity experts and give you the advanced trading tools you need to execute your strategies.
At RJ O’Brien, we’re here to give you exactly that. If you’d like to incorporate gold into your investment strategy, we urge you to contact us today.