Given the current economic climate, it’s no wonder that the topic of economic recession has been on many people’s minds—and no wonder that when we think recession, many of our minds think back to 2008. This is especially true for me because during the 2008 downturn, I was serving as Director of the United States Mint and was involved in helping guide economic policy at the highest levels of government.
Though there are important differences between the circumstances that led to the Great Recession and what is happening in today’s economy, I believe that the lessons we learned are still relevant—so I would like to share with you what I saw, what I learned, and what happens to gold during a recession.
What Is a Recession?
According to the National Bureau of Economic Research (NBER) Business Cycle Dating Committee, a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Though some define a recession more narrowly through the lens of real Gross Domestic Product (GDP) shrinking over at least two quarters, others take a more holistic approach to understanding economic shifts.
Given the fact that the first two quarters of 2022 showed an overall decline in GDP, some economists have claimed that we have already experienced or are currently experiencing a recession. Others point to third-quarter growth and other economic indicators like shrinking unemployment to claim that we are not in a recession yet.
Regardless of whether we are in a technical recession, two important things to remember are that our economy has been shrinking and that it is the goal of the federal government to slow down the economy in order to tame inflation.
While recessions come in all lengths and degrees of severity, the current state of the economy has several things in common with the Great Recession (and Great Depression): a great deal of uncertainty as to when to expect a stabilized economy and an unprecedented increase in the money supply.
When the Financial Crisis of 2008 hit, no one really knew the best way to fix it (there was no book, professor, or anyone with firsthand experience). It took several years to realize that, based on the economic policies chosen by the federal government—quantitative easing, low interest rates, and increasing the money supply, but not regulatory reform/deregulation or tax relief—the economy would recover slowly. And when the economic crisis caused by the COVID-19 pandemic occurred, it involved government-mandated shutdowns to help manage the public health crisis.
As for the money supply, an unprecedented increase applied to a relatively strong underlying economy—an economy that bounced back once COVID restrictions were eased—resulted in the highest inflation we’ve seen in 40 years. Now the Federal Reserve is tasked with reducing inflation, which they are attempting to do by “cooling off” the economy—essentially enacting measures that increase the risk of a recession. This involves siphoning the excess money supply by raising interest rates, making it more expensive to borrow, and incentivizing both individuals and businesses to put their money in the bank rather than spend it. Less borrowing and more saving would slow down the economy—but may also lead to a recession.
There is a small chance that the Fed can do this perfectly without causing a recession; thus, virtually all economists believe that there will be a recession in 2023. Initially, most had believed it would be a deep recession, but with the latest numbers, some economists are saying it may be a mild recession.
Another economic factor impacted by high interest is a relatively strong dollar. This may not make sense at first, as high inflation (reported at 7.7% in October 2022) reduces the dollar’s spending power as prices increase. But compare that 7.7% to the EU’s 10.7% or the U.K.’s 9.6%, and the American dollar looks stronger by comparison.
When it comes to gold, it’s important to note that while gold is currently down from its historic high set in 2020 and held back by this relatively strong dollar, the precious metal has been down less than stocks, cryptocurrency, bonds, and cash.
Historical Gold Prices During U.S. Recessions
Historically speaking, gold prices have risen during previous recessions as people look to protect their wealth. During the Great Recession, gold rose from $803/oz. at the beginning of the recession in December 2007 to $934/oz. by the end of it in June 2009. Although there was a dip in the middle, overall gold continued its rise and recovery while other asset classes struggled. Besides the Great Recession, gold has gone up during nearly every recession since the United States went off the gold standard in 1972.
During my tenure as Mint Director, I saw gold demand increase 700%, to 1.4 million ounces, and silver demand rise almost 500%, to 47 million ounces, peaking in 2011. Demand was so high that production could not keep up, and we had to ration what we could make. Also, gold prices skyrocketed from around $600/oz. when I became Mint Director in September 2006 to $1,900/oz. when it peaked in 2011—an increase of over 300% and a new historic high.
The more recent economic crisis caused by the global pandemic pushed gold prices up from around $1,500/oz. in late 2019 to nearly $2,100/oz. in August 2020, yet another new historic high. And just like during the Great Recession, production could not keep up with high demand, in this case exacerbated by supply chain disruptions and plant closures caused by the pandemic.
All this remains in line with what we’ve seen historically—that many people turn to gold as a stabilizing part of their portfolio during times of financial crisis.
Is Gold Good to Have During a Recession?
Since we left the gold standard in 1972, there have been seven recessions (and we are experiencing, or may be about to experience, another one). Each time, the price of gold shot up. Because of gold’s ability to hold or increase its price during recessions, many believe it is a smart move to buy during a recession. Buying gold is seen by people not only as a price play, but a store-of-wealth play as well. Gold prices historically have outperformed some other assets during recessions, and unlike Lehman Brothers’ stock or Argentinian bonds, gold will always be worth something.
Is Gold Good to Have in an IRA During a Recession?
Over the last 50 years, recessions have been happening frequently—at least once per decade. This frequency, combined with gold’s historic performance during recessions, can make gold an important part of retirement accounts. Judging by current economic forecasts and depending on your age, a recession will likely happen between now and when you would begin taking distributions from a gold IRA.
Should You Buy Gold During a Recession?
History makes a strong case for owning and buying gold during a recession, as well as adding gold to your retirement portfolio in the form of a precious metals IRA. That said, whether or not to buy gold is always a decision that comes down to you. There is risk in any type of asset purchase, so it is good to weigh the data, look at your own financial position, and seek the advice of a professional.
It may also be helpful to examine the long-term price trends of gold. While on a day-to-day basis, the price of gold might rise and fall, the overall trend continues to see the price of gold going up. Purchasing gold before that overall trend leads the price higher means purchasing it at a lower price.
To learn more about how to time your gold purchase, you can read our blog “Is Now a Good Time to Buy Gold?”
Portfolio Considerations
Another way to help protect your wealth before or during a recession is to look at how your personal or retirement portfolio is currently diversified. Diversification is an important tool for any portfolio, especially during times of economic uncertainty, and diversifying by adding precious metals to your portfolio or opening a precious metals IRA may help provide a hedge against the overall impact of a recession.
Check whether your portfolio is properly diversified with our diversification quiz. If you decide that now is the right time to add gold to your portfolio, expand your existing holdings, or explore the benefits of adding precious metals to an IRA, request a free Gold Information Kit, and we’ll help you get started.
