Before we begin, take a moment to imagine something immensely valuable.
Treasure, wealth, riches beyond belief.
What was it that came to mind first?
For most people, the answer is usually gold. For thousands of years, cultures around the world have used gold as a store of value. Today, gold maintains that role, and also acts as a reliable safe haven from economic volatility and uncertainty.
Those trying to time their investments might often switch between gold and other assets, a strategy that’s easier said than done. Yet, there is a final use case for gold. Gold is an asset class all of its own, and many investors will dedicate a portion of their portfolios to gold and leave it untouched for years.
Are these people simply “gold bugs,” with a zealous view of gold as an object to be treasured? Or does investment in gold as an asset class pay off over time? How have precious metals performed over time?
Gold as a Long-Term Investment
The historical success of gold as a store of value lends it credibility in the markets. Unlike fiat currencies, whose values depend on supply rates and policies made by central banks in response to economic conditions, the value of gold remains relatively stable.
Gold prices from 1970 – 2020 (non-adjusted). Data source: Macro Trends
Gold has seen price fluctuations since the gold standard was removed in the 1970s. After periods of consolidation, however, the price has consistently moved higher. This price increase is likely due to the effects inflation has on the value of the dollar coupled with gold’s wide recognition as a safe-haven, store-of-value asset. If you’re wondering how gold compares to silver, our gold vs silver IRA article covers the pros and cons of both options.
How Does Gold Perform During a Recession?
Investors often flock to gold during times of economic uncertainty or disaster because it’s considered a stable store of value. While other assets lose value during times of economic uncertainty, gold usually increases in value.
The Great Inflation of the 1970s
In August 1971, the Nixon administration removed the U.S. dollar from the gold standard, turning the dollar into a fiat currency. Historically, the gold standard has helped regulate the value of national currencies.
Since the 1930s, spot gold prices were stable at around $35, and it was illegal for an individual to own more than $100 of gold. But this steady period was not to last. Along with other ill-advised monetary policies, breaking away from the gold standard contributed to the devaluation of the dollar.
From 1972 to 1975, the inflation rate doubled to 8.09% from the preceding four-year period. Interest rates rose 20% in an effort to combat the economic downturn. By January 1, 1976, gold was worth $176.52 per ounce, nearly four times its value of $37.88 on January 1, 1975 — just one year earlier.
By the beginning of the 80s, the Federal Reserve raised the interest rate to 20% in an attempt to crush out-of-control inflation. This unprecedented rate of interest finally reined in gold’s bull run and tamed inflation. The immediate economic crisis was over, but this drastic monetary policy of interference went on to have severe consequences for the housing market and other aspects of the U.S. economy.
Gold During The Great Recession Onwards
2006 onwards saw the collapse of the U.S. housing market due to unsound practices from Wall Street banks and mainstream financial institutions, triggering a major financial crisis and worldwide recession. As a result, investors sought refuge in gold.
Between January 1, 2007 and January 1, 2011, gold prices rose 110.24%, from $631 to $1,327.
While it’s too early to measure the impact of the ongoing financial crisis caused by the COVID-19 pandemic, the monetary easing measures rolled out by the U.S. federal reserve has inflated the money supply by an unprecedented amount. These measures create favorable conditions for bullish momentum in gold, with investors seeking to avoid impending cash inflation.
Microstrategy CEO Michael Saylor pointed out in a recent interview that while the nominal rate of inflation is zero, investors are getting less value their money due to central bank policies. Saylor suggests that cash is losing its real-world value.
How Does Gold Perform in a Growing Economy?
In healthier economies, gold often lags behind some assets, but still tends to hold its value. Below, we’ll examine the performance of gold during growth periods.
Growth in the 1980s
After a brief recession in 1982, gold lagged throughout the 1980s. Gold prices saw modest gains of 6.91%, rising from $383.95 to $410.49.
Gold saw significant peaks and troughs throughout the mid-80s, and this volatility correlated with a reduction in interest rates, weakening the anti-inflation case for gold.
Source: St. Louis Federal Reserve
U.S. GDP growth dropped steadily from 1984 onwards, falling from 7.24% to just 1.89% in 1990. A brief recession ensued, but by 1991 the economy was gearing up for success. However, as we saw in our earlier section, gold’s prices moved sideways rather than down in the 90s despite major economic growth.
Economic Recovery After 2010
After the Great Recession, low inflation contributed to an economic recovery in the United States. Gold remained flat during this time before going on a run in September of 2018, gaining 59% since then and reaching new all-time highs after the 2020 pandemic hit the economy.
While its price gains were modest, gold held its value and then some during this rally.
Gold as an Investment Going Forward
Gold can often reduce or even completely offset losses during economic downturns.
This data points to gold as being a relatively low-risk investment that more than pulls its weight in a mixed portfolio. Gold has moved significantly higher in price over the past few decades, typically rising, consolidating, and rising higher at a gradual pace.
What Factors Could Influence Gold Prices Going Forward?
Gold has been rising for a reason. Here are some of the factors driving the gold price that remain ongoing.
- Changes in gold production.
-
-
- Gold discoveries have declined steadily over the last 30 years, with experts asserting that all the world’s major deposits have likely been found. The supply of new gold is drastically decreasing.
-
- Demand rising on dedollarization efforts.
-
-
- Central bank gold purchases hit a 50-year high in 2018, accounting for 15% of all global gold sales, and that level was surpassed the following year. Then, in 2022, central bank gold demand reached the highest level in history.
-
- Increased accessibility to gold.
-
- Gold is seeing a growing number of investment options emerge, offering new choices for investors. These are completely different from the more reliable option of buying physical gold, which has the advantages of physical ownership, intrinsic value and limited supply.
With a diminishing supply, inflationary cash policies, and more sophisticated ways to gain gold exposure, the market’s appetite may well increase. If you’re interested in using your retirement account to purchase gold, visit this page for more information, or read about some of the other options for investing in precious metals here.
