How Does Gold Perform Amid Extreme Economic Turmoil?

Last month, the World Bank predicted a slowdown in the global economy, forecasting that economic growth would go down from 5/7% in 2021 to 2.9% in 2022. The World Bank warned that there was a compounded risk of global recession due to the Russia-Ukraine war and that less developed countries in East Asia and Europe were extremely likely to face a major recession.

In such times of economic turmoil, investors often turn to assets such as gold to store their money. Thanks to its ability to retain value even during times of extreme upheaval, gold has been a popular safe haven asset for decades. But can the precious metal appreciate in value during recessions? Can investors see returns from their gold stocks even in a recession?

Gold’s value as a safe haven comes from its extensive history as a stable exchange medium long before the development of paper currency, and the fact that its an extremely scarce precious metal. Additionally, gold and the stock market have a low-to-negative correlation, meaning gold price movements are rarely associated with how stocks are doing in the market.

Over the past five decades for example, gold has seen positive price movements during economic recessions. While these movements haven’t been dramatic, especially since 2000 when gold prices have countered the S&P 500 during three recessions, they have secured gold’s position as a store of value capable of withstanding financial turmoil.

The 2008 recession, also known as the Great Recession, cost Americans $9 trillion in wealth and caused losses of $2 trillion in global economic growth. Conversely, gold saw extremely positive price movements in the same period, more than doubling in price between 2007 and 2011 as demand for safe-haven assets hit an all-time high.

The coronavirus pandemic also resulted in positive price movements as fear and uncertainty drove investors to gold-backed exchange-traded funds and drove gold prices up. This year, however, poor market conditions haven’t led to increased gold prices. In fact, prices for gold stocks have reduced by 2% year-to-date, partly due to increasing interest rates.

As costs of living have risen dramatically amidst trade barriers, supply chain constraints and shortages, the Federal Reserve has taken an increasingly hawkish stance to prevent the economy from falling into inflation. For example, the Fed recently increased the benchmark interest rate by 0.75 percentage points, the largest increase since 1994, raising the opportunity cost of holding gold.

Even so, gold has historically underperformed before interest rate hikes and surpassed the dollar and U.S. stocks afterward. And with inflation reducing the purchasing power of every dollar, investors will likely turn to tangible assets such as gold. Only time will tell if gold performs as it has in days past and retains its position as a safe haven asset. You can bet that precious metals companies such as Hecla Mining Company (NYSE: HL) will also be closely following how the markets respond to the brewing economic downturn.

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