In the current economic environment, protecting personal investments during a crisis is a major challenge. Whether it’s stocks, bonds, cryptocurrencies, or gold, the uncertainty of a recession can cast doubt on their stability.
What is a Financial Crisis?
A financial crisis, or recession, has a specific definition. It might sometimes seem like we are already experiencing a crisis, but financial institutions need certain criteria to be satisfied in order to formally recognize a crisis:
“A recession is a substantial and prolonged decrease in economic activity across a wide area, typically identified by two consecutive quarters of declining gross domestic product (GDP).”
This definition is accepted by the international financial community. However, there have been instances where this definition has proven inadequate. A notable example is the Great Financial Crisis of 2008, triggered by the collapse of Lehman Brothers. The timing of recessions is often misjudged, leading to heightened fears. Forecasting the start of financial crises is inherently unpredictable.
To safeguard your investments, it’s crucial to be prepared. Diversifying across assets allows you to capitalize on different economic phases, whether they’re periods of expansion or downturns. The timing of recessions is often misjudged, leading to heightened fears. Forecasting the start of financial crises is inherently unpredictable. To safeguard your investments, it’s crucial to be prepared. Diversifying across assets allows you to capitalize on different economic phases, whether they’re periods of expansion or downturns.
What is Gold’s Performance During Times of Crisis?
To understand gold’s performance during a crisis, let’s examine the gold price fluctuations during periods the US government labelled as recessions starting in 1971, when the US dollar ceased to be tied to gold:
- Oil Crisis of 1973:
November 1973 – March 1975
Gold price increase: +73.83%
- Stagflation in the 1980s:
June 1979 – November 1982
Gold price increase: +57.12%
- Black Monday (1987):
October 19, 1987
Gold price increase: +4.64%
- Dot-Com Crisis:
March 2001 – November 2001
Gold price increase: +6.37%
- Great Financial Crisis of 2008:
December 2007 – June 2009
Gold price increase: +11.19%
- COVID-19 Crisis:
February 2020 – April 2022
Gold price increase: +19.67%
Compared to other asset classes, gold generated significant returns during these crises, indicating it as a safer option during such times due to its unique characteristics. However, it’s important to note that gold has not always outperformed other assets. For example, during the dot-com crisis in the early 2000s, the US stock market initially outperformed gold. By the end of 2002, the Nasdaq index, composed mainly of technology companies, had lost 75% of its value, with investors enduring estimated losses of over five trillion dollars.
Why is Gold a Safe Haven Investment During a Crisis?
The performance of gold during crises can be attributed to its nature as a safe financial instrument. For millennia, gold has been widely used as a form of money due to its limited supply. Gold cannot be produced indefinitely, and even with the discovery of large reserves, extracting it incurs substantial expenses.
Gold has long been seen as a valuable asset, a perception reinforced by the increasing demand from central banks globally. Their purchases of gold have surged to record levels over the past two years, with a 15% increase in acquisitions during the first ten months of 2023 compared to the same period in 2022.
Before you invest in gold, it’s important to thoroughly educate yourself. Gold as an investment doesn’t generate income or offer short-term returns; rather, it serves as a long-term investment aimed at preserving your purchasing power.
Including gold in your portfolio can offer stability during times of uncertainty. The amount of gold you hold can help counterbalance losses from other assets during a crisis, and may even lead to positive returns.
