According to Forbes contributor David Rodeck, a recession is a “significant decline in economic activity that lasts for months or even years.” Formally, a recession is defined as being two or more quarters during which economic activity contracts. Symptoms of a recession include rising unemployment, falling personal incomes, and lagging industrial output. Although recessions are an unavoidable part of the economic cycle, they can bring intense pain to people and financial markets.
One tried-and-true hedge against the negative impacts of such downturns is the acquisition of gold. As a general rule, gold prices appreciate during challenging financial times. But is this always the case? In this blog post, we’ll examine two recent examples of how bullion reacts during severe recessions.
The Global Financial Crisis of 2008
One of the worst recessions in world history spanned 18 months during 2008 and 2009. Known as the global financial crisis of 2008, the meltdown is widely attributed to subprime mortgage lending and a series of massive bank failures, highlighted by the Lehman Brothers collapse. In desperate need of relief from a global credit freeze, industries across the board entered contraction, as evidenced by the crash in U.S. stocks in the fall of 2008.
During this period, gold prices saw a dramatic uptick as investors attempted to manage heightened systemic risk. In the aftermath of the recession, from 2008-2012, bullion rallied from an open of $872.37 (2008) to a close of $1664.00 (2012). The extraordinary gains totaled more than 90 percent. The appreciation in value was attributed to institutional risk management and gains related to a slumping USD.
Of course, the pre-crisis period of 2001-2007 also brought positive gains to the bullion markets. So was the rally of 2008-2012 a product of recession or simply a continuation of the pre-crisis uptrend? The answer to that question is debatable. Nonetheless, historical examples—such as the Great Depression, the 1970s oil crisis, and the 2000 dot.com bust—suggest that gold prices normally outpace riskier assets as uncertainty grows.
The 2020 COVID-19 Pandemic
This year has been a particularly active one for the global economy, highlighted by the coronavirus (COVID-19) pandemic. When the contagion spread worldwide, economic output was quickly halted as lockdowns, quarantines, and travel bans became new norms.
In comparison to the prolonged strife of 2008 and 2009, COVID-19 almost instantly brought on a worldwide recession. Rampant unemployment and record low GDP figures defined the economic weakness of Q1 and Q2 of 2020. During this period, uncertainty dominated market sentiment as industry, governments, and central bankers scrambled for an answer to the chaos.
Albeit on a compressed timeline, gold prices reacted to the COVID-19 recession in a bullish fashion. During the initial market panic of March 2020, bullion plunged as mass capitulation drove the USD to multi-decade highs. In the months following March 2020, gold robustly gained market share and posted new records. From the low of March 2020 ($1472.35) to the all-time high of August 2020 ($2,058.40), gold prices promptly returned 39.8 percent to investors.
Do Gold Prices Always Rise During a Recession?
Generally speaking, gold rallies during recessionary economic cycles. However, it’s important to realize that this tendency isn’t a guarantee. Factors such as panic buying, government stimulus, and central bank quantitative easing (QE) can run prices higher, but other factors can promote correction. Potential drivers of bearish price action include a sudden spike in the bullion supply or a shift to a hawkish monetary policy.
