Asset Strategy, Market Insights

The Need for Gold as an Investment in Declining Economies

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Why gold investing is a solid investment strategy

For thousands of years, gold has served not only as currency but also as a successful preserver of wealth. It has witnessed the fall of empires and survived wars, financial crises, and hyperinflation. When other assets fail, gold as an investment may safeguard your wealth. That’s why it’s a solid recession investment strategy.

When the economy falls into recession, most investors see their stock portfolios drop too. But if you understand how assets correlate and the simple rules you need to follow so you can diversify your portfolio to protect and grow your wealth, you can avoid and eliminate your losses altogether.

By owning uncorrelated assets, you reduce your risk of losses. Such assets may include bonds, equity investments, and stable dividend-paying stocks, but neither of these effectively hedge against large market declines.

One asset stands out: gold. The precious metal is one of the most uncorrelated assets to stocks—in fact, history shows that gold’s correlation to stocks and other investments drops further during a recession, as seen in the chart below.

Gold as an investment asset has a low correlation or is uncorrelated with most other assets.

When assets have a correlation of 1, they always move in the same direction, while -1 means they move in completely opposite directions. As we can see, gold as an investment has a negative correlation with the S&P 500, both during periods of appreciation and during recessions.

Long term, this means gold and stocks will always move in opposite directions, and during recessions gold investing will typically offset losses incurred by other assets. Since 1965, we have seen eight recessions. In the chart below, see how gold has performed during each of them.

Gold as an investment has gone up in price during the majority of the last eight recessions.

During five of these recessions, gold increased—in three of them, it even jumped by double digits, including during the Great Recession and during the current pandemic. Gold is a safe-haven asset, and during periods with economic turbulence, uncertainty, or recession, investors seek out gold investing to protect their wealth. The two recessions during which gold prices went down occurred when interest rates were historically high. Remember Paul Volcker’s 22% rate?

Add gold as an investment to your retirement portfolio

It’s simple: to preserve the value of your investments and retirement savings, your recession investment strategy should include adding gold as an investment to your portfolio. And you should do so before the next recession begins, so you can fully benefit from the precious metal’s strong ability to protect your wealth.

Don’t invest in physical gold in case a recession comes but because it comes. No one knows when the current recession ends but the odds of a recession coming at one point or another after the current one are 100%.

You don’t need to be a fortune teller to see why it’s wise to include gold as an investment in your portfolio—history clearly shows recessions are inevitable, and gold can shield the rest of your portfolio from heavy losses. If you own a meaningful amount of precious metals, you stand a much greater chance at doing well in the next recession than people who don’t own precious metals. Just after the 2008 recession, the price of gold went up 3-fold in three years, and during the current recession the precious metals set a new record, proving yet again its value as financial insurance.

Now is the time to turn to gold investing

From a timing perspective, now is the perfect time to insure your portfolio with gold. The reckless monetary and fiscal policies of our government are ongoing and will extend the current recession or lead us into a deeper one. When that happens, investors will turn towards gold investing as a recession investment strategy. That means the precious metal will become much more expensive to acquire.

When demand for gold really grows, it may become difficult to acquire the precious metal. We saw that during the Great Recession. Gold buyers had to pay upwards of a 15% premium over the spot price to invest in physical gold and 20% or higher in premium for silver. Shipping was delayed up to four months, and during some days suppliers even advised dealers not to sell because they couldn’t promise the orders could be filled.

Once a serious crisis hits the global economy, gold and silver may be unavailable no matter the price. Then, it will be too late to protect your portfolio and wealth with precious metals, threatening your standard of living. Insurance is effective when it’s purchased before the accident. You will not be able to insure your portfolio once the damage is done.