On September 26, 2022, Reuters reported that gold prices fell to $1,621.50/oz.—its lowest price since April 2020. Just a few days earlier, on September 23, 2022, CNBC quoted Steve Hanke, a professor of applied economics at John Hopkins University, as saying, “There’s an 80% chance of the U.S. falling into a recession—much higher than previously predicted.” In fact, according to a survey by MassMutual, more than half of Americans—56%—think that our country is already in a recession.
If these two pieces of information—lower gold prices and increased chance of recession—don’t seem to make sense to you, you’re not alone. Historically, gold demand and prices have increased during times of economic turbulence and uncertainty. But a few different factors are in play this time around.
If you’ve been reading these articles long enough, you know that I’m not a worrier. Instead, I like to look for opportunities in any piece of what others might consider “bad” news. This situation is no different—in fact, this might be the opportunity many of you have been waiting for.
Gold prices have been kept low by a strong dollar and strong U.S. Treasury bond yields—but that may not last long.
According to a September 26, 2022, article by The Wall Street Journal, the reason gold demand has gone down is partly because traditional assets like cash and U.S. Treasury bonds are looking good as safe-haven assets. Several Treasuries have hit multi-year high yields, with the 10-year bond at its highest level since 2010, the two-year bond at its highest level since 2007, and the seven-year bond “reaching a peak [last] seen in 1993” according to Bloomberg.
The U.S. dollar, meanwhile, is sitting at a 20-year high. In a September 23, 2022, article, CNN Business pointed out that since “transactions of commodities, including gold and other precious metals, usually happen in dollars…a stronger currency makes it more expensive for foreign [consumers] to buy in and can reduce demand, pushing down prices.”
These multi-year highs have been created thanks to the interest rate increases shepherded in by the Federal Reserve as it attempts to curb the ongoing inflation crisis. However, some analysts believe that the central bank’s policies may also be leading us to recession.
We’ve already seen gold rally to new highs during a recession.
Back in 2008, the Federal Reserve was pumping money into the economy through a policy of quantitative easing—buying up bonds from big banks to increase the amount of cash those banks had on hand and could then lend to consumers. If you go back and look at gold prices from the time, you’ll see that during the 2008 financial crisis, gold actually dropped 34% from its peak before bottoming out—and then soaring. According to an April 2020 article by CNBC, the precious metal nearly tripled in price, reaching a then-all-time-high price in 2011.
Why does this matter in 2022? According to a CNN Business article from September 26, 2022, Federal Reserve chair Jerome Powell said, “We have to get inflation behind us. I wish there was a painless way to do that. There isn’t.” If the U.S. economy is headed for rocky terrain, it may mean that gold is once again preparing to bounce back and reach new heights.
You can take peace of mind in knowing that you still hold gold as part of your portfolio.
Gold has historically performed well during times of economic turbulence and uncertainty. Gold most certainly has performed well over the long term. So while some consumers may be seeking out cash or bonds for their short-term safe-haven properties, the dollar is still slowly losing its purchasing power over time. Fox Business recently reported that according to the Labor Department, the Consumer Price Index, which covers everyday goods like gasoline, groceries, and rent, “rose 8.3% in August  from a year ago.” That truth remains regardless of how the U.S. dollar currently stacks up against other world currencies.
As I’ve said, in these types of situations, I look for opportunities. According to World Gold Council CEO David Tait, “The horizon for gold in the relatively near future is positive.” Ruth Crowell, chief executive of the London Bullion Market Association, was quoted in a September 19, 2022, article by The Wall Street Journal as saying, “To be sure, gold remains a better option than stocks.”
If a recession is coming, I’m going to take comfort in knowing that I hold gold as part of my portfolio. It’s a tangible, long-term asset that has provided Americans with peace of mind for generations. And with gold prices at multi-year lows, it just may be a great time to buy.
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