Monday, February 29, 2016

The Myth That Gold Is a Great Performer During A Recession

On Friday, I reported on an advisory on gold, Deutsche Bank: It’s Time to Buy Gold.

In my post, I noted:
It is a myth that gold goes up during a recession/depression. There were very specific circumstances why gold went up during the Great Depression, that, is FDR manipulated the price higher via Treasury buying, for the benefit of John Maynard Keynes and Bernard Baruch.
I got the usual response by those who believe gold always goes up. These were the comments left under the post:





  • "is a myth that gold goes up during the a recession/depression."

    Actually I believe youre perpetuating a myth Robert. This can be true ONLY if the demand for gold is below that of other goods and commodities in the market. You and Gary North should be aware of this.

    Gold has a special HISTORIC, and not a priori, aspect to its market perception versus other goods. If the economy is tanking, not because of inflation, and people find gold to contain a sense of security and thus a "premium" over holding dollars, I would consider this a demand-side ordeal and thus not inflation in the current sense youre talking about.



  • Gold does go up during deflationary depressions. People get scared. It also goes up during inflationary depressions.


  • Gold hardly ever goes up during a recession/depression. A recession/depression is a period of general asset liquidation, including gold.

    This can be understood by taking a look at the last 5 recession. (Gray shaded areas are periods of recession.)

    During the 1980 recession, the price of gold collapsed.




    Things were even worse in the recession that started in 1981. Gold never recovered to its pre-1980 recession levels and crashed to as low as $314.00 an ounce.




    Here is what occurred during the 1990 recession.



    During the 2001 recession, gold was actually up, but that was probably because gold had been declining for nearly a decade before that. From that perspective, the gold climb was not that impressive.



    Here is gold's performance during the most recent recession.


    To be sure, gold tends to be a leader coming out of a recession, but that is at the end of a recession. But even then, the price remains lower than it was at the peak reached during the early months of a recession.

    Thus, if one is expecting a recession, the last thing you generally want to do is buy gold, especially if you think it is going to be a severe recession. There are exceptions to this rule if there is stagflation, that is, a recession and accelerating price inflation, but the driver of the gold price during such a period is the inflation and not the recession.

    As I said in my original post, gold should be bought at the present time aggressively but as protection against accelerating price inflation, not as a hedge against a downturn in the economy.

    If you, however, think we are in the initial stages of a recession (and that the Fed is "stuck" and "can't get inflation going and interest rates will be pushed back down"). it will mean a general liquidation of assets, and gold should be sold. I consider the view that we are on the edge of a recession at present absurd. No doubt, the Fed manipulated boom will end at some point but there is no indication it is going to end soon. The indicators (which I report on in the EPJ Daily Alert)  point to an acceleration in price inflation and that is the major reason to buy gold now.

      -RW

    6 comments:

    1. I have "monetary uncertainty" and philosophical opposition to the USD. In the long, long term, I don't see how it strengthens with this much government debt outstanding.

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    2. Thanks for the clear explanation.

      One thing I am unclear about though, is the cause of all of the government purchases of gold during the last recession. Was it to protect themselves from devaluation of currencies in other countries? Is it their currency/gold ratios that they are worried about (even though they wouldn't admit it)? Other reasons?

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    3. GOLD IS BOTH A COMMODITY AND A LAST RECOURSE MONEY; rw IS CORRECT IN WHAT HE SAYS?BUT HE MISSES ONE IMPORTANT FURTHER REASON WHY IT MAY BE IMPORTANT TO BUY GOLD AT SOME POINT. IF WE ARE COMING TO THE END OF THE CREDIT CYCLE AND A COLLAPSE OF ANY REMAINING VESTIGES OF FAITH IN FIAT MONIES,THEN GOLD BECOMES THE ULTIMATE REFERENCE MONEY. AFTER THE END OF WORLD WAR 2 AND EARLIER DURING THE WEIMAR IMPLOSION,WOMENS' BODIES,ALCHOHOLIC LIQUOR,ETC SERVED AS A MEANS OF EXCHANGE; UNDER THESE CIRCUMSTANCES,THE VALUE OF MOST ASSETS PLUNGES AS GOLD RISES WHILE THE ECONOMY TRIES TO SEEK OUT ITS MEAN.CREATION OF NEW MONEY WILL HAVE RECOURSE TO GOLD IN ORDER TO BUTRESS FAITH. GOLD WILL THUS INCREASE DRAMATICALLY IN VALUE; AS IT WILL IF AND WHEN THE STATES TRY TO BAN ITS POSSESSION AND HUNT IT DOWN.IT IS LIKELY THAT THIS IS A SCENARIO WHICH CONFRONTS US.

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    4. I believe the author, as most "economic experts" has failed to address the fact the price of gold is fixed by a handful of people, and rigged through the paper market. The large banks have admitted this in the LIBOR scandal. Until metals trade in a free market, we shall never know where gold trades in a recession. Please utilize proper grammar when insulting me.

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    5. The price is fixed not dictated by the free market. The author fails to point this out. Please utilize proper grammar when insulting me.

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    6. What matters is how gold performs relative to other assets during a recession. If stocks, bonds and real estate are falling faster than gold, gold looks relatively good.

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