Gold Outperforming in a Global Recession
The coronavirus recession is unusual in the sense that it affects multiple economies simultaneously. Never in the history of the modern world have we seen economies on the same side of the business cycle at the same time.
At times, while some parts of the world were in a recession, some other ones experienced growing economic conditions. Not this time, as the pandemic affects all economies.
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The price of gold has been closely watched during the pandemic, especially since governments and central banks expand the money supply in unprecedented ways. Gold was always viewed as protection against inflation, or this is exactly what leads to inflation – too much money chasing fewer goods.
Currently, the price of gold trades comfortably above at the $1800 level. It threatens to make a new high above $2000, while the USD is not that weak as many would believe. What is curious is that gold broke higher almost one year prior to the coronavirus pandemic and underperformed during economic growth.
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The chart above, courtesy of Pictet Wealth Management, shows the current and the last economic recessions – the coronavirus global recession and the Great Financial Crisis of 2008-2009. In between the two, the price of gold simply consolidated. In fact, it had an inversely correlated reaction with global economic growth.
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Now that the global economy is affected by the coronavirus pandemic, gold is favored again by investors. This is especially true considering that literally, all central banks communicated their commitment to keeping rates low for an extended period of time, so alternatives to earn a higher yield are limited.
Moving forward, the only question is how much the current global recession will deviate from the trend. The sooner the economic growth comes back to the main trend line, the faster the price of gold will reach a top. On the other hand, the more the economic recession affects growth, the higher the price of gold goes.
At times, investors wonder why the gold price is not rising. From an economic growth point of view, that is a positive sign. It means investors have other alternatives to earn the risk-free rate and to be compensated with a higher yield for their investment risk. When gold is on the rise, it spells troubles as its price is not only affected by supply and demand imbalances, but by how investors view the global economy.
Currently, the outlook is bleak, explaining the higher gold prices.