Gold Price During Recessions

Someone recently wrote in a dismissive, almost pompous, tone something to the effect of, "Everyone knows gold doesn't do well in recessions". But, is that true? Well, it depends...

click to enlarge
The author - whoever it was and whatever exactly it was that they wrote - could have done just a little research and quickly found an answer to the question they probably never really wanted an answer to, confident that what they felt in their gut was correct.

This is common amongst financial writers who believe that history began in 1982.

So, what do gold price movements during recessions depend on?

As shown above, the gold price has moved up and down during recessions, the important distinction between the two being that the direction has been decidedly up during commodity bull markets and down during commodity bear markets.

Over the last thirty-some years, since the price of gold was allowed to seek a market value, there have been two commodity bull markets, the first ending around 1980 or 1981 and the second beginning around the turn of the century. In recessions during both of those periods, the price of gold has risen.

During the long commodity bear market, from 1981 to 2000, recessions resulted in a lower gold price.

The chart above shows price changes during the NBER defined recessions as well as an expanded time period (six months on either side) which serves to reinforce the point made by using the standard definition.

Save for the 1980 transition period, the data seems to be pretty clear.

Where does that leave us today?

If the 1974-1975 period offers a good model for the current period - a pause during the middle of a 12-18 year run which is typical for these cycles - then gold investors have nothing to fear. Regardless of when the current recession officially began and when it ends, the gold price is likely to move higher.

If, on the other hand, the summer plunge in the natural resource sector is a 1980-like event, where prices for both gold and crude oil made multi-decade highs, then that's an entirely different matter.

For anyone who has looked closely at the question, it should be clear that the more valid comparison is the former and not the latter.

Comments

[Gerry Sullivan:]

1973-1975 was characterized by a gut wrenching bear market in stocks, rapidly rising oil prices, and the Nixon resignation. At the end of 1974 American's right to own gold was restored, creating a surge in demand.

In 1980 we were experiencing runaway inflation culminating in the Hunt's attempt to corner the silver market. There was a loss of confidence in the role of paper money as a store of value.

My guess is that we are in a deflation that will tip to inflation. Gold will do well, but probably not for the next 12 months.

2008 Oct 22 08:03 AM

[Mark Anthony:]

Tim:

Absolutely stunning Russian Checkmate event that you MUST read:

seekingalpha.com/artic...
st-save-haven-investme...

2008 Oct 22 10:44 AM

[Mark Anthony:]

Sorry, try this link:
tinyurl.com/54ppc6

2008 Oct 22 10:44 AM

[Dell:]

Check-out Silvarado Goldmines... they are going to be huge....SLGLF

2008 Oct 22 11:16 AM

[Cesato:]

Ok Tim then I believe you own bullion Gold and paper Gold in quite significant amounts. Don't you?. Gold bugs don't get it, you know that "hope is not a strategy". Where I have to agree with you is in the long term outlook but please do not say that now is a buying opportunity, USD 560 will be and the run will last 2 years at least with yet another attack to USD 1000 and higher due to the upcoming unprecented infaltion numbers. Now I don't know what is a worthy bull trend for you, for me the double top formed between 1982 - 1987 offer the opportunity to make 4 runs with a 100% profit each on 2 / 2 year cycles and better than that the last bear run marked the beginning of the actual (yet exhausted bull run). Now did you see the chart since 1980? and did you see the lovely "the third is the charm break in 2005 at USD 500? that's what I'm talking about. Gold is going to go down for a goodbye kiss to the USD 500/550 level and then back up. Before that happens you keep buying, I'll keep selling.

2008 Oct 23 03:21 AM

[Jake2:]

Gold has been going down. Tim, where do Gold Bugs put their heads?

2008 Oct 28 12:56 AM