How Has Gold Done Over the Last 6 Recessions?

Physics 101

We own zero crystal balls, and do not intend on creating fear around a stock market crash. We are also not making any predictions here.

That being said, we are in an 11 year bull run, and a correction is imminent at some point. How can you protect your portfolio against the next dip? There are a few ways.

People have made large sums of money over the past decade as the market has been peachy. Making the transition into a more protective investment approach can be difficult when things have been so good for so long, but, what goes up must come down.

The major source of financial risk in the financial markets today is currency risk. So the reason that gold is so unique as a hedge is it hedges this currency risk and acts as a currency against which all the other currencies are compared. So it is considered to be the most sustainable currency. The central banks in the US, China and Russia (to name a few) are building physical gold in massive volumes.

Why are the smart people doubling down on gold right now?

Gold has a history of being the best hedge against asset inflation.

The yield curve

People are starting to wake up to the reality that the current bull market could very well likely be coming to a close.  The current yield growth curve is a signal for many people in the know that times are about to get a lot tougher.

Banks borrow money from the Fed, central banks around the world and other entities in the short term market and lend it to people in the long-term market. Also, the interest rates of depositors is determined by short term bond yields while interest rates of borrowers is determined by long term yields.

Basically, the bank borrows money for 1% and lends it to you for 4% and makes money on the 3 percent difference. When the yield curve is zero or negative, banks can’t make money by lending money, so they stop lending money. This means less money in the system and credit crunch. If people and businesses can’t borrow, the economy can’t grow.

That’s when there’s panic in the streets.

 

Gold wins 83% of the time

Over the last 6 economic downturns gold has done well 83% of the time.

1976-1978

In the 1976 recession the market dropped by 20%, in the same period of time gold increased 54% as an asset inflation hedge.

1980 – 1982

In the 1980 recession the market dropped by 27%, in the same period of time gold dropped 46%.

1987

Black monday, the market crashed 33% between August and September, while gold increased by 6% during the same period of time.

1990’s bear market

Stocks dropped 20% while gold increased 7%.

2000 – 2001

During the dot-com bubble the market dropped 50% while gold increased by 12% over the same period of time.

2007-2009

During the great recession from 2007-2009 the stock market dropped 50%, while gold increased 25% over those 2 years.

According to Bloomberg,

Global gold reserves rose 145.5 tons in the first quarter, a 68 percent increase from a year earlier, the World Gold Council said Thursday in a report. Russia remains the largest buyer as the nation reduces its U.S. Treasury holdings as part of a de-dollarization drive.

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