Why do Investors Flock to Gold During Recessions?
Gold has always been seen as a safe investment during times of crisis. This is largely because buying physical gold serves as a defense against inflation and counter party risk.
Even if the price of gold goes down, it still maintains its value over time and will still give you back a good chunk of the money you invested in it. During times of recession, this kind of safety is especially important.
Gold’s performance during the last recession
The 2008 recession was set in motion by the housing crisis and echoed throughout the world. It saw the decline of the S&P 500 index by nearly 37% between December 2007 and March 2009—but the price of gold rose by 24% during the same period.
This wasn’t an immediate increase, however. When the recession first hit, gold saw an immediate increase of 30%, but as time passed, this growth slowed. It even went down by 10% at one point.
This vast variance in value was a cause for concern for a lot of gold investors, but by February 2010, the price of gold was up by 24% again and it held its value at a time when stocks didn’t. In fact, the price of gold never fell as much as stocks did, even at its lowest price.
Gold as safety
Gold is a physical asset. Its value is unaffected by the value of paper money. In the event of a total recession that results in structural collapse, gold is the most rational choice for a primary currency.
The quantity and value of gold are dependent upon its supply from mining companies, instead of banks printing paper money with monetary value assigned to them. It’s one of the most consistently bought investments globally.
Most investors believe that investing in gold is protection against inflation and the fluctuation of currency, and history backs this belief. Gold consistently outperforms stocks during recessions, and offers much better returns during times of uncertainty.
Should you buy gold as an investment?
The COVID-19 pandemic has sent the prices of gold hurtling up again. The US Mint, as well as many other mints, have shut down production due to the risk of the virus spreading among employees.
This exacerbates the gap between the supply and demand of gold. The latest report from the US Mint shows that sales of American Eagle Gold bullion coins in the first two weeks of April were almost five times that of April 2019.
The price of gold rose up to $1,725 per ounce and is projected to go even higher. It would be prudent of any American gold investor to make their investment in gold now.
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