Gold: proven portfolio protection in times of recession

The EU Commission recently published an expert assessment according to which the Eurozone might narrowly avoid a recession and inflation rates could fall slightly by the end of 2023. However, currency devaluation, which limits purchasing power and thus consumption, alongside the fact that  corporate financing is hampered by the ECB’s key interest rate hikes, are a burden on the economies of the Eurozone countries which cannot be ignored. By definition, two consecutive quarters of negative or stagnating  GDP constitute a recession.

Falling share prices mark contractionary economic phases

In addition to declining consumption and pessimistic economic forecasts, weakening benchmark indices, amongst others, are typical signs of a recession, which has a negative impact on the performance of investors’ portfolios. According to an analysis of the last eight major and minor US recessions, conducted by Incrementum AG and based on economic data from Reuters Eikon, gold has in every case reliably acted as a balancing factor amid slumps of the leading index S&P 500 – such as during the oil crisis in 1974 and 1975, the financial crisis of 2008 to 2009, and many countries’ recent COVID-related economic downturns.

Can gold absorb recession-related portfolio losses?

During the weakest economic phases of the analysed eight recessions in the US economy, the S&P 500 index lost a maximum of 6.3 per cent on average, while the US gold price gained 14.5 per cent, and the gold price in the Eurozone saw an even more significant rise at 18.1 per cent. Investors’ portfolio losses due to weakening share prices were, of course, only rarely compensated by gold, as most portfolios’ gold share is relatively small. However, in all cases analysed from 1970 to 2020, the precious metal was able to fulfil its task as a portfolio stabiliser and safe haven, thus counteracting investors’ losses in stocks.