How Gold Outperformed Stocks During The Last Recession
If Forbes contributor Jesse Colombo is right about how the economy is just ahead of another serious jam, what investments might be the best place to stash hard-earned money? Well, if we look at the last time around for a recession — in that 2006 to 2010 period — one of the best-performing assets involved a well-known precious metal.
Will it act the same way if another economic squeeze unfolds? I don’t know, but it might be interesting to examine how the metal performed so well during the last difficult period and see how it might be setting up for whatever comes next.
Here’s the monthly price chart of gold continuous futures contract during the last recession period with the slightly before and slightly after included:
The price rose from 65 in 2006 to 180 in 2011. If you had been able to buy and sell at those spots, you would have ended with a much-better-than-the stock market record.
The reason for this type of gain in the precious metal: fear. Investors had been so pleased with their stock market returns from 2001 that they’d become comfortable with the prevailing bullish psychology. Once that comfort starts to look threatened, fear arises and that’s when gold starts to look attractive again.
Do gold stocks go along for the ride? Not necessarily. Since the unloading of all stocks becomes the rule of the day, even those in the rising commodity sector can fade with the total equity market deterioration. Here are 2 examples from the previous recession period: Newmont Mining, the gold miner that tanked with the rest of the stock market and Royal Gold, which managed to continue upward even as other miners faded.
Here’s the Newmont monthly price chart with the 2006 to 2011 time frame in the box:
Note that the sudden drop in 2008 coincided with the stock market’s sudden drop. The big mining stock came back — as did most stocks — but the better bet would have been to simply buy the commodity.
The Royal Gold price chart looks a little different:
If you’d been able to pick it up at the 2007 through 2010 lows near 20 and then sold it post-recession highs near 50, that would have been sweet.
Unfortunately, most trade-able gold mining stocks have that Newmont pattern — where the overall market selling took everything down with it. I would guess it might be difficult to discern in advance which miners might make it through an economic storm in the way that Royal Gold did.
If you believe a serious recession is on the way, the charts suggest you might be better off with the actual metal rather than attempting to pick a mining equity. Or, you could think about a gold exchange traded fund like the SPDR GLD that closely tracks the price of the metal.
You can see how this SPDR GLD chart closely compares to the gold chart above:
On the other hand, if you believe that no recession lurks and that the economy is just fine, then this information may be of uncertain value to you.
I do not hold positions in these investments. No recommendations are made one way or the other. If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.
This article originally appeared in Forbes.