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Gold Prices in the Next Recession

There seems to be increased interest in prospect of a potential global recession.  Although this is still unlikely in 2019 or 2020, what could it mean for gold?

To answer this, let’s look at what gold has done in the prior two recessions.

First, defining a recession:

Before connecting how the price of gold performs during recessions, let’s define a recession.  Figure 1 is the unemployment rate for the European Union (EU) since 2001.  The figure captures two recessions.

The first recession, depicted by the gray bars, occurred between September 2001 and May 2004 (again, according to the EU unemployment rate).  From the start of this tech bubble-driven recession to the end of the recession, the EU unemployment rate increased from around 8.3% to 9.3%.  Compared to the global financial crisis of 2008, this increase seems relatively minor.

Fast forward to the next recession, covering the period from March 2008 to July 2013.  Over this period, the EU unemployment rate went from a low of 7.3% to a high of 12.1%.  This period was not a pretty period for many workers in the EU.

Connecting the Unemployment Rate (Recession) with the Price of Gold

Having established the periods of the past two global recessions, let’s take a look at how the price of gold performed during the past two recession.

In Figure 2 are two lines.  The first line, in orange, is the just-presented EU unemployment rate.

In blue is the PM price of gold, reported on a daily basis.  This price corresponds with the left axis.

What happened with the price of gold during the past two recession?

During the 2002 recession, gold was relatively flat.  The price floated in a narrow range of around €315 per troy ounce.

Interestingly, the price of gold shot up like a rocket.  The price went from around €575 per troy ounce to a high of €1,372.

Perhaps more interesting was the relative consistency in the rise.

This was likely driven by gold acting as a hedge against imprudent fiscal and monetary policy.  The rise was almost awe-inspiring.

Since the end of the global financial crisis, gold gave up some of its price appreciation before re-appreciating in recent months.

 

What’s the takeaway?

What does this all mean for the performance of the price of gold should a global recession materialize in 2019 or 2020?

The answer, of course, depends partly on how physical demand changes.  Some of that demand likely goes down during a recession.

More important than the demand change could be how governments and central banks respond to a recession.  If governments respond by spending more money and printing even more, then gold will likely be a big beneficiary because of a concern for inflation.  It’s this inflationary hedge, in addition to real demand, that will likely keep the price of gold growing in the coming years, even if a recession comes about.