Gold Investment during Recession

Economics is not very good at explaining swings in economic activity.  We don't know what causes recessions.  We've never known. 

 —Eugene Fama

In this article, we will not speculate on whether a recession is coming or will it be a mild recession or not.  But, we will focus on gold market development during a period of recession.

Mild Recession vs Deep Recession

A technical recession normally started when GDP contracted for two consequent quarters.  However, recessions are officially declared by the National Bureau of Economic Research (NBER), a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

In this article, mild recession vs deep recession are differentiated roughly by how long the pain last:

• Mild Recession
• Is a short and shallow recession like in 1990-91 or in 2001
• Would be a relatively negative scenario for the yellow metal
• Deep Recession
• Is a long and severe recession like the Great Recession or a short but deep one like the pandemic recession of 2020
• Note that pandemic recession of 2020 was caused by the Great Lockdown
• There was a long recession in 1973-1975 and later a double-dip recession in the early 1980s.
• Would be much better for gold

Mild Recession and Gold Investment

A mild recession would be a relatively negative scenario for the yellow metal. Here is why:^[1] 

It could still gain somewhat, but markets are forward-looking and when a recession is shallow, they would anticipate a quick recovery (which would rather support equities and other risky assets). 

The mild recession would also allow the Fed to stay relatively calm and to not fire all the monetary ammunition – while gold would prefer the U.S. central bank to go fully dovish.

Deep Recession and Gold Investment

A deep recession would be much better for gold. Here is why:^[1]

During severe economic downturns, moods are really pessimistic, and risk aversion is high. Hence, investors shift into safe-haven assets such as gold. 

What’s more, the Fed would then break out all available weapons to avoid a full economic catastrophe, even in the face of high inflation. This would create excellent conditions for gold to rally.

If a deep recession is accompanied by a financial crisis or sovereign-debt crisis, when confidence in a financial system and fiat money is ultra low, it would be a really perfect scenario for the yellow metal.

Potential Risk for a Deep Recession is High

The author of [1] bets on a deep recession in the current environment (09/10/2022).  Here is why:^[1] 

A lot will depend on the path of inflation. If inflation remains stubbornly high, the Fed could continue its hiking cycle, which could trigger a potentially severe recession.

In addition, there is so much debt that hikes in interest rates and withdrawal of liquidity in the form of quantitative tightening could trigger a financial crash or an economic crisis.

Warning

You could read other companion articles at this blogger:

• Gold Investments During Rate Hike Periods
• Gold Investment— All Things Considered

However, always consult your financial adviser before making any changes to your investment plan. It's also wise to consult with your financial adviser before adopting any of the recommendations made at this blogger.

The darker the color the riskier the financial asset.
The darker the border the less liquid the instrument

References

1. Gold Wonders How Severe This Recession Will Be
2. An Asian Bretton Woods?
3. 3 Drivers Of Gold
4. Gold Is The Geopolitical Hedge Of First Resort, Goldman Sees $2150 Within 12 Months (posted on 02/14/2022)
5. Stocks, Bonds, & Bitcoin Dump'n'Pump As 'Meh'-Minutes Reverse Russia-Rout
6. Gold Investment— All Things Considered
7. How Debt Jubilees Work 
• Suffice to say, my main plan (i.e., Lyn Alden Schwartzer) throughout this period is to mainly hold scarce assets- things like productive cash-producing companies, commodities, real estate, and hard monies, rather than being too heavily invested in fiat currency or bonds at any given time other than for some liquidity and optionality. 
8. Flows show recession risks are rising - BofA (02/21/2022)