Gold prices (in U.S. dollars) have been rather tame and boring over the last several years, especially for those hoping to make money (in U.S. dollars) on gold investments.
Gold peaked in 2011 above $1,800 per ounce. That little bubble popped while stocks continued to climb. The price of gold did go down with the 2008/ 2009 financial crisis, but it quickly recovered.
Gold mining stocks have been especially bad over the last several years. I warn not to use gold stocks as a substitute for gold when setting up a permanent portfolio. Gold stocks are extremely volatile and should be used for speculation only. When they finally do recover, the profit potential will be enormous.
Gold has recently shown some signs of hope with the price going above $1,300 per ounce. It is hard to know if this is just a brief rally or whether it will continue. Of course, if any of us knew this for sure, we would be extremely wealthy.
I have been warning about the flattening yield curve. There is a very narrow spread these days between the 3-month yield and the 10-year yield. This indicates trouble ahead. We have already gone a decade without an official recession. If the yield curve inverts, then a recession in the near term looks certain.
If we do get a recession, what will happen to gold? In terms of dollars, will it go up or down?
If it follows 2008/ 2009, it will initially go down and then quickly recover. But we know that history does not repeat exactly. The bigger certainty to me is in bonds. If we hit a recession, I fully expect long-term bonds to rise in value. That is the same as saying that long-term yields will fall.
In a recession, U.S. Treasury bills are seen as a safe haven. It isn’t gold. The only exception is when there is a high fear of significant price inflation. This happened in the 1970s when the price of gold went up in spite of recessionary years. This changed in the early 1980s when the Fed under Paul Volcker slammed on the monetary brakes and allowed interest rates to spike. That was the end of the biggest gold bubble in modern-day history.
The Search for Liquidity
There is a saying that cash is king. Cash is really king in a recession. It doesn’t mean you literally have to have cash. It is referring to liquidity. You need the ability to access money. You don’t want it tied up in a house, a retirement account, stocks, an annuity, or other assets. The only exception, as just discussed, is long-term bonds. You want easy access to money in a checking account or a savings or money market account where can get to it quickly. You also want to avoid debt as much as possible. This is especially true for when a recession hits.
Cash is king for several reasons. You don’t want your wealth tied up in assets that are declining in value. You also want cash because you will have the opportunity to buy those assets that have declined in value significantly. In a recession, prices tend to decline. Your “cash” may actually be gaining value instead of its typically losing value to inflation.
The rush to liquidity during a recession is a problem for gold. People are trying to pay their bills and reduce their debt. They are trying to build up a stronger cash position if possible. If anything, people who hold gold are probably more likely to sell in order to gain cash.
The big money investors, meanwhile, are trying to avoid massive losses. They have money tied up in stocks, real estate, businesses, etc. They are trying to come out without taking too much of a beating. They probably aren’t looking to buy gold except when the price gets low enough that they see it as a bargain.
In a recession without massive inflation, gold will tend not to do well.
There is something that is working in gold’s favor though during a recession, and that is the Federal Reserve. We can be rather certain that the Fed will engage in another round of quantitative easing (digital money printing) as soon as it is evident that we are in a recession.
It will depend on how aggressive the Fed is. It will depend on timing. But overall, assuming the Fed does inflate again, gold will likely recover as it did in 2009. If the Fed is crazy enough to start expanding its balance sheet again as it did from 2008 to 2014, we will ultimately likely see all-time new highs for gold, at least in nominal terms. One good dose of monetary inflation could easily push gold to $2,000 and beyond.
Timing everything, as with all investments, is the tough part.
I think it is important to have your core holdings as part of a permanent portfolio. This will not change. If we hit a recession and the Fed starts pumping in new money, then it will be time for speculation. This might be a time to look at mining stocks.
If and when we have a recession, the Fed should allow the correction to take place. Unfortunately, that is the least likely path that the Fed will take. It will continue to hurt our prosperity by depreciating the dollar and helping Congress to fund its deficit spending.
But at least we know what the Fed is likely to do, and we can at least somewhat prepare for it. Cash will be king in a recession, but you will want to move some of that cash into gold and gold investments when the time is right.