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Investors have turned to gold investments in recent years. So much so, in fact, that the precious metal price has hit record highs multiple times since the start of 2024.
It is no wonder that investors flocking to goldeither. In times of high inflation and economic uncertainty, gold can be a smart way to protect your wealth. When appropriate, it can also be a wise tool for recession-proofing your portfolio.
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Why Gold is a Key Asset in Recession-Proof Portfolios
Are you looking for a way to prepare for a possible recession? Here’s why experts say gold may be a good idea.
Gold Price Rises When Worries Do
Gold has long been considered a protector against inflation and a safeguard of wealth, so that when consumers start to worry about the economy, interest in gold increases.
“Historically, gold has been viewed as a hedge against economic instability, inflation, or currency decline,” says Matthew Argyle, certified financial planner and owner of Encore Retirement Planning. “In other words, gold is like insurance against economic disasters.”
For this reason, investing in gold not only becomes more popular during tough economic times and recessions, but demand also drives up prices.
“Gold will be volatile at the start of a recession, but will first rebound once fear and margin calls subside,” said Michael Chadwick, president of Fiscal Wisdom Wealth Management. “Once that time passes, gold will do well for an extended period, and the more severe the recession and the higher the inflation, the better it will do.”
In fact, James Cordier, CEO and head trader at Alternative Options, says gold price could reach $3,000 next year – compared to $2,600, the price is closer to today.
“We view the underlying long-term fundamentals as extremely bullish,” says Cordier. “Investors looking for alternative assets next year could provide the catalyst needed to reach this level.”
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History repeats itself
The proof is in, as they say, and historically, gold has performed well in past recessions.
“During the recession of 1973 to 1975, gold jumped 87%, during the recession of 1980 to 1982, gold saw a modest increase of 1.6%, but in 1983 it rose by 20 %,” explains Eric Elkins, CEO of Double E Financial Solutions. “During the Covid-19 recession from January to August 2020, gold rose 28%. Based on this historical chart, gold has consistently outperformed during recessions.”
“We currently have an almost perfect recipe” for gold, Chadwick says. “It’s more compelling than ever in recent history.”
It diversifies your portfolio
Gold is also a good portfolio diversify. It tends not to follow the same trajectory as other asset classes, so when you see a slowdown in one area – like the stock market, for example – gold often gains ground. This allows you to offset these losses and reduce your overall risk.
“The stock market gained overall, but there were marked periods where gold was the clear winner,” says Argyle. “These were huge economic events, and the outperformance lasted for years: the Great Depression, the stagflation of the 1970s, the tech bubble, and then the financial crisis of the first decade of the 2000s.”
The essentials
Gold can be a good way to protect your portfolio against recession, but exactly how much should you buy – and in what way? Although “everyone’s risk appetite is different,” says Elkins. “We generally like to initially allocate between 5% and 20% to gold or other precious metals in the event of a recession or in anticipation of a recession.”
As for how to do this, Argyle suggests gold ETFs or mutual funds, as they allow you to conserve cash. Gold Individual Retirement Accounts (IRAs) are also a good option.
With these approaches, “you don’t have to worry about the troubling aspects of owning gold: reselling coins, high brokerage fees, transportation, storage, and insurance to cover disasters or theft,” he says.
