ETF Strategy - Gold and Recessions: What to Know This Time Around

September 18, 2020

Article by Maxwell Gold in ETF Strategy

With GDP posting a record low of -31.7% for Q2 2020, the United States officially entered its first economic recession in over a decade.

Gold is popularly associated with providing a potential hedge during economic downturns, so it’s not much of a surprise that it has risen 27% year-to-date and is on track to have its best year since 2010.

Given continued uncertainty during this current recession, it may pay to not only focus on gold’s historical track record during these phases but also to evaluate the key drivers supporting gold’s current outlook, which remain strong – even against the potential for a US economic recovery.

Gold leads in the recession procession

The investing merit of gold during recessions is a common association, and as Figure 1 highlights, this is well earned. Since 1971, when gold began freely trading in the post-Bretton Woods era, the US has experienced seven economic recessions. During these periods, gold averaged a 20.19% return, which has led the way compared with other major US assets – including US stocks, Treasury bonds, corporate bonds, and the US dollar. Additionally, gold managed to provide positive returns and outperform broad commodities in all but one of those periods (1990-1991).

An economic recession is typically preceded by a market downturn, in which generally deep-value opportunities in stocks emerge. Simultaneously, investor behavior also tends to shift defensively, which has generally aided gold investment demand. Additionally, during recessions, central banks have tended to lower policy interest rates – which, coupled with a reduction in risk appetite, puts further pressure on bond yields. If history is any guide, this low-yield environment may present an accommodative backdrop for gold to perform well.

Gold’s behavior during recessions is fairly clear, and in favor of the yellow metal. Looking at gold’s performance during other cyclical phases shows that, on average, gold also fares well outside of recessions. Turning from lagging indicators — such as GDP — to leading economic indicators shows that gold’s average monthly return is positive during all four phases of a full cycle (see Figure 3). On an average monthly basis, gold has done its best during periods of recession and slowdown — outperforming equities, Treasury bonds, and the US dollar.

During periods of US recovery and expansion, gold has shown positive returns, while ...

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