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Why Gold Is Your Best Insurance Against the Next Recession

by Jan 25, 2020Investment Strategy

The qualities of gold are many, but from an economic perspective, its role as a currency and its ability to preserve wealth are the ones you should really care about. Over 5,000 years, gold has survived—and even thrived— during times of war, financial crises, falling empires and hyperinflation. Other assets often fail during times of distress, but gold’s unique qualities mean that the precious metal may safeguard your wealth when other assets start to crack. The most recent example is the reaction of the price of gold to news about the death of the Iranian general or to the second case of the Corona virus found in the US. When sophisticated money managers feel a safe haven is needed, gold is their number one choice. Putting geopolitical tensions and health pandemics aside, gold is the best investment strategy to protect your wealth during recessions, when most investors watch their stock portfolios plummet. If you understand the correlation between assets and follow a few simple rules, you can diversify your portfolio with gold to both protect and grow it while avoiding losses altogether. The trick is to own uncorrelated or inversely correlated assets, which will reduce your risk of losses. Some investors look to bonds, equity investments, and stable dividend-paying stocks, but none of these assets effectively hedge against recessions or other drastic market drops. When you are invested 100% in paper assets and the market drops, your assets will go down—in many cases, at the same time. Sometimes, even the best stock or bond picks will not help when markets start to panic, and good and bad stocks are sold off en masse. The key is to have enough assets in your portfolio that are outside of the dollar-denominated financial system of stocks and bonds. Land and gold are two such examples. Gold stands out because it’s one of the assets least correlated to stocks, especially during recessions: Assets with a correlation of +1 always move in the same direction, while assets with a correlation of -1 always move in completely opposite directions (they are said to be inversely correlated). Gold is negatively correlated with the S&P 500 during recessions. With a long-term view, the negative correlation means that gold and stocks will always move in opposite direction. This relationship is especially strong during recessions, which means gold will typically offset losses in your portfolio that are incurred by stocks. We’ve experienced seven recessions since 1965. In the chart below, we can see how gold performed during each recession. As we can see, gold rose during five of the past seven recessions, and in three of them the precious metals climbed by double digits—including during the Great Recession. The only times gold decreased occurred when interest rates were historically high—for instance, when Paul Volcker instituted a 22% rate. We don’t have rates that are remotely close to that at this time, and the discussion in the financial media is that rates will continue to go down to support the market, which will be even more bullish for gold. Take for instance what gold did (doubled) with 1% rates between 2003 to 2007 and then with 0% rates between 2009 and 2011 (tripled). While nothing in finance is a “no-brain” decision, including gold in your portfolio is the closest to it if you want to preserve the value of your investments and retirement savings during recessions. And it’s important to do so before the next recession if you want to fully benefit from the safe-haven ability of the precious metal. In other words: Invest in physical gold because a recession will come, not in case it comes. No one can know when the next recession comes, but one thing is sure: it always does. And all signs point towards a recession coming in the near future. Now is the perfect time to insure your portfolio with physical gold. The irresponsible fiscal and monetary policies of our Federal Reserve and our government’s running deficits are leadings us into the next recession, and when that happens, investors will seek out gold to protect their wealth. This rising demand will make gold much more expensive. During the Great Recession, precious-metals buyers had to pay close to a 15% premium over the spot price for physical gold and 20% or higher in premium for silver. In addition, shipping was severely delayed, and sometimes suppliers even advised dealers to not sell at all since they couldn’t promise their orders could be filled. So, gold and silver may become unavailable during the next serious crisis—no matter what price you’re willing to pay. As a result, your investments and maybe even your standard of living will be jeopardized. Insurance is only effective if it’s purchased before the accident—you will be unable to insure your portfolio when the damage has been done. The sage financial advice for centuries has always been this: You don’t wait to buy gold—you buy gold and wait. Whether you heed to this advice is completely up to you.