The economic recovery has been weak since the great recession of 2008 / 2009 and many Austrian economists believe that we are heading towards another recession. We have had 20 recessions within the last 100 years. This comes out to one recession every five years on average, so it is not a matter of if we will have another recession but rather when we will have it. In this article we will explore how gold, silver, and oil perform during a recession. These three assets have been some of the most talked about commodities during the last couple of years.
Gold is a monetary metal and has traditionally been the asset of choice during periods of economic and political uncertainty. It is often identified as an inflation hedge but it is also a good safe haven investment. It has been used as money for over 5000 years and still has strong cultural ties in many countries throughout the world. During the last four recessions, gold increased in price, three times out of four and it barely made it in the red during the recession of 2001.
Silver is both an industrial metal and a monetary metal and its price performance is more dependent on economic activity. Silver is also much more volatile than gold. It has been known to stage huge rallies and make sharp corrections. During the last four recessions the price of silver was up in price two times out of four.
Crude oil is the lifeblood of the economy and it is more closely tied to economic activity than most other commodities. Crude oil was down in price all but once during the last four recessions. The chart below shows the performance of gold, silver and crude oil during the last four recessions.
Commodities are usually the first to correct in price when an economy starts to contract. This even happens in a commodity bull market. The crash of 2008 showed us just how quickly commodities can fall in price. Virtually all commodities made a sharp correction in the 2008 selloff. Oil and silver were hit the worst and even gold made a sharp downturn. But by the time we were out of the recession gold had already made new highs and silver were back to where it started while oil was still down. The next table shows the change in price during the last four recessions.
We are entering a period where the economy might be slowing down. The stock market and many commodities are not far off the 2007 / 2008 highs. At this point it may be wise to take some money off the table, accumulate cash and physical gold. Paper alternatives such as SPDR Gold Trust (GLD), Central Fund of Canada (CEF) and iShares Gold Trust (IAU) can be used to a lesser extent.
Disclosure: I am long GLD.