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When the economy starts to decline and the media begins to suggest that there’s an impending recession on the horizon, what can investors do to protect their money and potentially capitalize on the situation? One of the places that many people have turned to happens to be one of the oldest and most recognizable assets that’s still used today: gold.
Investing in gold during a recession can be advantageous because its value tends to rise as the stock market falls and investors look for a safe place to preserve their capital. This is due mainly to its scarcity as well as gold being universally recognized as a medium of exchange.
Of course, gold isn’t the only investment to consider during a recession since there will be opportunities in other asset sectors too. In this post, take a closer look at gold and see how it's classically performed during previous recessions.
We'll also highlight a few other important investments to keep in mind as you work towards shielding your money and leveraging this recession to your advantage.
Is Gold A Good Investment During A Recession?
Whenever the economy starts to show signs of trouble, something investors will notice is that the price of gold typically starts to rise. To fully appreciate why this is happening, it’s helpful to understand what makes gold valuable in the first place.
Why Gold Is Valuable For Investors
Gold has been regarded as a medium of exchange and store of wealth for centuries. It was used by kings and civilizations long before people started using fiat currency, the government-issued “paper money” that you and I use today.
As a matter of fact, U.S. dollars were redeemable for a fixed amount of gold up until 1971 when then president Nixon took the country off of the Gold Standard.
Gold derives its value from three important characteristics:
- It’s widely desirable – You can go anywhere in the world and gold will be recognized as having value
- It has relative scarcity – Gold is not easily mined relative to other precious metals. Therefore, its supply is somewhat limited
- It has a wide range of uses – Aside from having it as wealth, gold has a lot of practical uses as a commodity for things like jewelry, electronics, computers, dentistry, etc.
When the stock market falls or the buying power of the dollar begins to erode because of inflation, investors lose confidence in these modern forms of assets. Instead, they will turn to what has historically done a good job of protecting their principal.
To give you some idea of how gold has performed in the past, let’s skip over the mini-recession that took place in 2020 during the start of the COVID pandemic and go back to the 2008 Great Recession.
This is when major financial institutions began to fail due to the sub-prime mortgage crisis, and it caused the stock market to lose nearly 50 percent of its value.
Yet, between 2008 and 2012, the price of gold increased by a dramatic 101 percent. This was mainly because investors flocked to the commodity as they waited for government intervention and the economy as a whole to get back on track.
Ways You Can Invest In Gold During A Recession
If you want to make gold a part of your portfolio, there are a few ways you can go about doing this.
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Buying Physical Gold
Investment grade physical gold is typically purchased as bullion (i.e. gold bars) or coins. This can be done by visiting a local gold dealer or ordering it online from a reputable source.
While having actual gold in your hands is nice, it does pose some challenges. For starters, gold bars are expensive costing $1,867 for just one ounce as of this writing. On top of that, physical gold can create some issues with liquidity and security.
One way around these problems is to purchase fractions of ownership in gold bullion from exchanges like Vaulted or OneGold.
Investing In Gold ETFs
One of the most popular gold ETFs is the SPDR Gold Shares ETF (ticker: GLD). This is a fund that trails the performance of an ounce of gold at about one-tenth of the market value.
ETFs are convenient because the shareholder can instantly buy and sell gold with the click of a button on their smartphone.
Just log on to a trading app such as Robinhood or M1 Finance, place your order, and you’re all set. No worries about who you’ll sell it to, how much you’ll get for it, and how you’ll keep it safe in the meantime.
Of course, the tradeoff is that you won’t actually own any physical gold. You (and thousands of other people) will essentially be investing in a company that is the true owner of the gold.
Buying Shares Of Gold Mining Companies
There are other ways to profit from gold beyond just investing in the metal itself. One of those ways is to invest in the gold industry – particularly in companies that mine, refine, and hold the rights to gold.
For example, the iShares MSCI Global Gold Miners ETF (ticker: RING) holds shares of 53 different equities. This gives the investor a diversified way to profit off of a wide range of gold mining companies.
The idea is that as the demand for gold increases, so would the profitability of these companies. However, investing in them would be more aligned with owning stocks than investing in actual precious metals.
For more great strategies on how to invest in gold, check out our article here.
Gold Alternatives To Invest In During A Recession
While investing in gold is an old strategy for protecting your money during a recession, it’s certainly not the only one in your playbook.
Several other investments can be used to shield your assets and may even offer some lucrative upside as the economy begins to turn back around – perhaps even moreso than gold.
Dividend-Paying Stocks
Companies that pay dividends can be your ally during a recession for two main reasons:
- You’ll make money even if the price is down – Dividend stock holders will still continue to receive distributions that will help to offset falling share prices and make investors feel more secure
- They’re good long-term buying opportunities – Since most dividend paying companies are value stocks by nature, they’ll be poised for higher returns than growth stocks as is classically the case in the first five years after a recession
Consumer Staples
Logically thinking, even during a recession, people still have to buy certain items: food, beverages, utilities, household goods, hygiene products, prescription drugs, etc.
These items which are essential for everyday use are what's known as “consumer staples”, and the companies that produce them will typically outperform the broader market when prices take a downward turn.
Real Estate
Buying real estate may seem like a risky choice during a recession. However, remember that real estate is bigger than just residential housing. Commercial real estate is also a highly lucrative business given that most companies lease space instead of owning it outright.
Just like an ETF, retail investors can own portfolios of commercial real estate through what are known as REITs (real estate investment trusts).
REITs not only have the potential to increase in value, but many also pay significant dividends – generally higher than what you might receive from a stock.
Is Gold A Good Investment During A Recession – Final Thoughts
Investing in gold when the economy is heading for a downturn can have its benefits. Typically, gold is regarded as a good way to preserve capital. This was true long before paper money was ever used, and it could even be observed during the Great Recession just over a decade ago.
If you'd like to add some gold to your portfolio, this can easily be done by buying physical bullion and coins. However, for better liquidity and security, you may want to consider ETFs that specialize in gold.
Nevertheless, gold isn't the only asset that can be used to protect or grow your wealth when we're heading into a recession. Other good investment choices include dividend-paying stocks, consumer staples, and even REITs.
Overall, what's important about a recession is that you see it as a potential opportunity instead of something to be feared.
Whether that means diversifying into gold or buying up stocks and real estate while prices are depressed, there's plenty of good you can do with your finances during these turbulent times.
