Is gold a good investment in a recession?
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Gold’s credentials as a hedge against inflation are well established. But its value as an investment during a recession is perhaps less clear. We’ll review the facts on both sides of the argument in order to help you make an informed decision.
What’s the definition of a recession?
A recession is a period of economic decline characterized by a fall in GDP, an increase in unemployment, and a decline in consumer spending in real terms. In the United States, the National Bureau of Economic Research (NBER) is tasked with officially determining the start and end of a recession.
Gold is a precious metal that has been used as a form of currency and a store of value for thousands of years. It is considered a safe haven asset, which means that it tends to hold its value or even increase in value during times of turmoil, financial or geopolitical uncertainty.
Pros of investing in gold during a recession
Gold tends to hold its value or even increase in value during recessions. Its allure as an investment shines as that of other asset classes wanes. This is especially true of stocks, whose value tends to fall during a recession, as companies revise their earnings down. Lower earnings per share call for lower stock prices. In turn, this can prompt some investors to diversify their holdings away from stocks into alternative asset classes, like gold.
Gold is a physical asset that cannot be easily counterfeited. It’s heat and water resistant, and will keep its properties for thousands of years. A gold bar or a gold coin cannot file for bankruptcy or experience financial distress, as is the case with companies and even governments. Its unique and unalterable physical properties go a long way towards explaining its appeal during a recession.
Gold is in high demand from investors all over the world. Central banks have long been net buyers of gold, and have stepped up their purchases since Russia’s invasion of Ukraine and the sanctions imposed by the United States on the Russian Central Bank’s dollar reserves. Individual investors have also turned to gold as a hedge against inflation. Last but not least, gold also has industrial uses, and a place in electronic and medical devices, dentistry and jewelry. Whilst industrial demand can wane during a recession, it is harder to predict how other users could change their buying patterns.
Cons of investing in gold during a recession
Gold is a volatile asset, which can experience large swings in price, up or down. This means that you could buy at a local high, and may need to wait months or even years if the market turns against you, in order to breakeven. This explains why gold is best suited to investors with a long investment horizon.
Physical gold is an illiquid asset, which means that it can be difficult to sell quickly. If you’re looking to sell gold coins or bars, you’ll need to find a jeweler willing to buy your gold back at a fair price. You may also need to be able to prove its authenticity, and be willing to have it tested. In other words, selling physical gold could take days, if not weeks, to materialize.
As gold doesn’t generate income, you won’t earn any interest on your investment. Instead, you may face storage and insurance costs, and will have to rely on capital appreciation alone to breakeven.
How to invest in gold
There are several ways to invest in gold. First, you can buy physical gold, such as gold coins or bars. This is perhaps the first idea that will come to mind. You could turn to a jeweler, or third party provider that will sell you gold and manage its storage on your behalf.
You could also invest in gold through a gold ETF or a mutual fund if you have experience of investing in the stock market. You could turn to gold-backed ETFs, like GLD or IAU, two exchange traded funds listed on the New York Stock Exchange. You could also turn to gold mining stocks, or ETFs that track the performance of the largest gold miners, if you prefer to diversify your holdings across a larger number of companies.
Finally, you could trade CFDs on gold through one of many CFD brokers. Turn to a comparison service like TrustedBrokers.com for reviews of best gold CFD trading brokers. A CFD is a financial derivative that allows you to speculate on the price of gold, without owning the underlying asset. CFDs are popular with day traders because they allow you to go long or short, with or without leverage. They’re also volatile instruments, best suited for experienced day traders with an understanding of risk management.
Conclusion
Whether or not gold is a good investment for you will depend on your individual circumstances and appetite for risk. If you are looking for a safe and secure way to store your wealth, then physical gold may be a good option for you. However, if you are looking for an investment that will generate income or that is highly liquid, then gold may not be the best choice.
It is important to do your research before investing in gold. You should understand the risks involved and the potential for returns. It’s also a good idea to reach out to a financial advisor to get personalized advice on whether or not gold is right for you.
