With recent fears of an economic recession looming in the distance, investors are looking to recession-proof their portfolios. Gold has historically been touted as an asset that booms in a recession because unlike fiat currencies such as the Dollar, Yen and the Pound, it has inherent value as a commodity currency.
When faith in fiat currencies and governments goes down, “God’s Money” goes up.
But with a rapidly changing economic landscape, these statements need to be re-evaluated and examined further. For short-term profit, is gold as good of a recession-proof investment as gold-bugs tend to say it is? Additionally, for the long-term, does gold really hedge against inflation and preserve wealth? Let’s go down the lists for and against.
In Defense of Gold-bugs:
- Gold is Scarce and Keeps Up with Inflation
Many Gold-bugs tout gold as a long-term commodity investment that preserves wealth. They argue that regardless of the inflating dollar, gold will always at least keep up with inflation in the long run because gold is a scarce and limited resource. That is, one of Gold’s best properties it that there is only so much on Earth to be mined.
In the long run, the dollar, for example, cannot have scarcity because the U.S government can print as much as it pleases to satisfy any preconceived economic or political motives. Therefore, investors see gold as a stable asset to invest in, and even in years where gold doesn’t keep up with inflation, gold’s scarcity will provide a footing, making it less risky than stocks or index funds.
- Newly Mined Gold is Flat-lining Relative to Human Population Growth
Although the amount of new gold being mined has historically been proportional to human population growth, this ratio has declined in recent years. The Metals Economic Group states that “gold ounce discovery is not keeping up to the rate needed to replace mined ounces.” At this rate of population growth, there will be a larger amount of money chasing a limited supply of gold, leading to increased prices.
3. “God’s Money” Will Replace Fiat Currency in the Long-Run
Another theory of why gold’s price may increase in the long-term is that in the case of a total fiat currency melt down, all money will pour out of “fake assets” like stocks, bonds, and paper currency into “real assets” like real estate, food, and gold.
The average life expectancy of a fiat currency is 27 years.
Although a total fiat currency meltdown may seem far-fetched at first, history would argue otherwise. The average life expectancy of a fiat currency is 27 years. However, outliers to this average include the UK, whose fiat pound has lasted over 300 years. The U.S. has been running on a fiat currency for almost 50 years since Nixon took the dollar off the gold standard in 1971. If citizens lose faith in fiat currency and the financial system collapses, gold would skyrocket.
One of the reasons gold hasn’t gone up incredibly in price, despite gold being scarce and human growth snowballing, is because money is spread across different assets- stocks, real estate, bonds, gold- thus diluting what the value of gold would be if society was like old times when gold was the only currency. Gold-bugs who believe in a future financial meltdown see society returning to the gold standard for currency and flooding the gold market with demand.
Also, society could feasibly go back to 40% of currency backed by gold, which could provide a significant amount of stability and faith in fiat currency. Alternatively, gold could simply increase in price per ounce, and society could back paper currency 100% by gold, or bullion and bars can be divided into small pieces for easy, physical exchange.
- Always a Commodity
For those that don’t believe in financial doomsday, gold still may be an okay investment. Regardless of whether there’s a collapse, people will still want gold for decorations like jewelry and furnishings, so there will always be some demand. In addition to decorations, gold has other uses in phones, computers, and aerospace technology, where its durability and dependability as a conductor is highly valued. Gold is even used for pigmentation in glass-making. Gold has been used and valued since Ancient Rome as a beautiful decor, and with its implementation in modern technological devices, it will likely be used for centuries to come.
Gold has been used and valued since Ancient Rome as a beautiful decor, and with its implementation in modern technological devices, it will likely be used for centuries to come.
- Short-Selling Profitable Investment
Other investors in gold simply buy the asset when prices are low, which is usually during an economic expansion, and then sell the gold once it peaks during a recession. Quick, short-selling of gold, much like that of stocks or bonds, is far less common. This can be a benefit because there’s less competition in the gold trading market.
The Case Against the (Not So) Precious Metal:
- Not an Inflation Hedge
Some years gold keeps up with inflation, and other years not so much, so investors may consider investing in assets with higher returns. As shown in the graph, the value of gold has fluctuated largely across time. From 1980 to 2001, gold lost 80% of its inflation-adjusted value. Over time, gold has zigzagged in purchasing power. In the 1970’s, an ounce of gold could buy a pair of dress shoes. In the 1980’s, an ounce of gold could buy a high-end suit, dress shoes, and belt. In 2001, it could only buy a cheap suit, shoes, and belt. Gold is not a magical commodity that protects against all inflation. Like other assets, it has ups and downs. Rather, gold could be better described as a crisis that outperforms other assets during absolute meltdowns, rather than the steady inflation hedge it is often touted as.
- Gold is Not a Necessity in Financial Doomsday
Secondly, during a financial doomsday, it’s quite possible that gold wouldn’t be a hedge against fiat currencies, as people won’t be investing in gold when they can barely afford rent and other necessities. Thus, it is arguable that commodity assets that are necessities, such as affordable housing, food, water, and energy, are far better investments than gold, even in the case of a fiat currency meltdown.
- Can’t Go Back to the Gold Standard
Another argument against gold as “God’s money” in the long term is that there’s no longer enough gold to support the expansive, global economy. Gold bullions would need to be divided into ounces for proper exchanges.
Additionally, even if we can go back to the gold standard, it doesn’t mean we should. Although gold would prevent price inflation, it wouldn’t be able to hedge against price deflation. Deflation isn’t a frequent problem in the modern day because the government can always print more money. However, if the quantity of money was limited, and the economy was rapidly expanding, there would be little price stability, which is arguably important for a well-functioning economy. The gold standard could spell disaster for the modern economy.
What’s more, deficits from newly printed money can be economically stimulating when used properly. A malleable money supply allows the government to shift the supply based on where the economy is headed; the only issue is when the government misjudges where the direction of the economy and what monetary policy can serve it best.
- May Not Always be a Demanded Commodity- or a Commodity at All
As alternatives for gold are created that look like gold and are as sturdy as gold, the former commodity currency won’t be as demanded for jewelry or furnishings. Other cheap natural and engineered metals and products exist as an alternative. Additionally, investors against gold may warn that just because an asset is an “okay” investment that will always have “some” value as a commodity, doesn’t mean there aren’t better places to invest money.
What’s more, gold may not even be a commodity. Other commodities like food and water have the important principle of limited usage- once food and water are consumed, they disappear. Gold, on the other hand, is mined and can be reused. This creates an increased, sustained supply of gold, thus lowering its long-term value. Through this argument, gold is a store of value, not a commodity; essentially, it will retain its purchasing power value overtime, but it is not an inherently useful product.
- Not that Profitable for Short-Selling
For investors who buy gold in the short term to sell off during recessions, gold may return far less than other assets could have yielded if bought during a trough and sold during a peak, such as stocks. Gold hasn’t gone up or down that much, aside from a handful of spikes over the past fifty years. Arguably, investors are better off trading stocks.
So Yes or No to Buying Gold?
In the long term, several of these cases rest on whether you think there will be a loss of faith in the US dollar and other fiat currencies. For investing in gold in the short term, it may be profitable to have a well-performing asset during recessions, while stocks lead a portfolio during expansions. Either way, a well-diversified portfolio is the key, and it’s up to the investor to decide if gold will be a part of their portfolio strategy. For myself, I’ll be investing a small amount in gold, but no more than the generally recommended 5–10% of net worth.