Questrade - Empowering you to take control of your financial future. Join the journey!

---

How do macroeconomic events like recessions affect Gold?​

---

Gold is often considered a traditional safe-haven asset, meaning it's a store of value that investors flock to during times of economic uncertainty, political instability, or market turmoil. Recessions fit this description perfectly.

Here's how macroeconomic events like recessions typically affect gold:

• Increased Demand as a Safe Haven:
  • Fear and Uncertainty: Recessions are characterized by economic contraction, job losses, falling corporate profits, and significant stock market declines. This creates widespread fear and uncertainty among investors.
  • Flight to Quality: People tend to pull money out of riskier assets like stocks and sometimes real estate, and reallocate it to perceived safer assets. Gold, with its long history as a store of value and lack of counterparty risk (it's not dependent on a government or company's solvency), becomes highly attractive.
  • Diversification: Investors use gold to diversify their portfolios, as it often has a low or negative correlation with stocks during downturns.

• Lower Interest Rates and Opportunity Cost:
  • Central Bank Response: During a recession, central banks (like the Federal Reserve in the US) typically cut interest rates aggressively to stimulate the economy.
  • Reduced Opportunity Cost: Gold does not pay interest or dividends. When cash, bonds, and other interest-bearing assets offer very low or even zero interest rates, the "opportunity cost" of holding gold (i.e., the income you're missing out on) decreases significantly. This makes gold relatively more attractive.
  • Real Interest Rates: Gold tends to perform best when real interest rates (nominal interest rates minus inflation) are low or negative. During recessions, nominal rates fall, and while inflation might initially decrease, the massive monetary stimulus often applied can lead to future inflation expectations, pushing real rates down.

• Weakening US Dollar (Often):
  • Monetary Policy Divergence: If the central bank of a major currency (like the US Dollar) implements more aggressive easing policies (rate cuts, quantitative easing) compared to other countries, it can weaken that currency.
  • Gold Priced in USD: Since gold is primarily priced in US dollars, a weaker dollar makes gold cheaper for investors holding other currencies, which can boost demand and its price.

• Inflation Expectations (Post-Recession or Late-Stage Recession):
  • Massive Stimulus: To combat recessions, governments often implement large fiscal stimulus packages (spending, tax cuts) and central banks engage in quantitative easing (printing money).
  • Future Inflation Concerns: While recessions initially bring deflationary pressures, the sheer volume of money injected into the economy can spark fears of future inflation. Gold is traditionally viewed as a hedge against inflation, as its purchasing power tends to be preserved.

Nuances and Exceptions
​

• Initial Liquidation Sell-off: In severe, liquidity-driven crises (like the initial phase of the COVID-19 pandemic in March 2020), investors might sell all assets, including gold, to raise cash. Gold is not entirely immune to these "dash for cash" moments, though it often recovers quickly.
• Deflationary Environment: While central bank responses to deflation (cutting rates) are good for gold, a sustained deflationary environment itself is not inherently bullish for gold, as it reduces overall purchasing power and the need for an inflation hedge. However, the fear of deflation often drives more money into safe assets like bonds, which pushes yields down and helps gold.
• Strength of the Dollar: If the US Dollar strengthens significantly during a global crisis (e.g., due to its safe-haven status or relatively better economic outlook), it can put downward pressure on gold prices, offsetting some of the other bullish factors.

In summary

During a recession, the default sentiment for gold is generally bullish. The combination of heightened uncertainty, a "flight to quality," declining interest rates (and thus lower opportunity cost for holding gold), and potential future inflation concerns typically leads to increased demand and rising gold prices. While there can be short-term exceptions or counter-trends, historical data largely supports gold's role as a resilient asset during economic downturns.

---