The Benefit of Investing in Gold During A Recession

Jan 11, 2023

The World Bank and International Monetary Fund (IMF) say that the world economy will be facing a crisis in 2023. In fact, in its report released on October, 11 2022, the IMF predicts global growth will slow down from 3.2 percent in 2022 to 2.7 percent in 2023. The IMF also indicates that several countries in the world, such as the United States, Europe, and China will experience the deepest economic slowdown and even have the potential to enter into a recession. Meanwhile, these countries account for about a third of the global economy.

Even so, according to the Minister of Finance Sri Mulyani, this prediction is not to frighten, but to make people be vigilant so they will be more careful in financial management. There are several things that can be done, including rearranging the spending budget, reducing or paying off debt, setting up an emergency fund, finding other sources of income, and making investments.

Talking about investing, choose liquid assets with low risk. Liquid assets are assets that can be easily converted into cash in a relatively short time. Meanwhile, low-risk assets do not offer faster and bigger profits compared to high-risk assets. However, during a recession is a good time to ‘play it safe’. Gold is one of the most appropriate investment instruments.

Quoted from the publication of Gold Prices During and After the Great Recession by the US Bureau of Labor Statistics, since the 1970s, gold has been used as an investment to hedge against economic instability, such as a recession.

The value of gold and a recession have an inverse relationship. When the economy weakens, the price of gold usually rises compared to other risky assets, such as stocks, mutual funds, bonds and securities, because investors are competing to save all of their assets in gold. This is evident during the last three recessions, in 2020, 2007 and 2001, gold prices tended to rise.

Here are some of the advantages of buying gold during a recession:

  1. Portfolio diversification

In investing, investors must diversify to reduce the risk of their portfolio. That way, a decrease in the value of one investment does not make the value of the entire portfolio decrease. And, because the value of gold is relatively stable, it can serve as a hedge of investment.

  1. Not related to stocks

Gold has a negative correlation with stocks, which means that when the stock market declines, the value of gold will increase. For example, during the recession from October 9, 2007, to March 9, 2009, the stock market fell 56.8 per cent and the price of gold jumped 25.5 per cent.

  1. Liquid commodity

Gold is a liquid commodity that can be converted into cash in most countries.

  1. Gold is easy to trade

Gold is very easy to trade thanks to its ability to maintain its value over the long term. Gold is a precious metal that can survive during financial uncertainty. It’s no wonder that most countries believe that they can survive various economic situations by having huge gold reserves. Therefore, gold is also often referred to as a haven asset.

  1. Gold protects from Inflation

Time has proven that gold is the only commodity capable of overcoming inflation. With its value increasing with the cost of living, gold often reaches its highest value during periods of high inflation. When there is an increase in inflation, the value of money decreases. However, in general, the price of precious metal gold rises, making gold more valuable.

  1. The value of gold is always increasing

The limited supply of gold and its high demand ensures that the price of gold will always increase. Therefore, gold is an investment instrument with very minimal risk related to its value.

  1. Gold is a counterweight to currency devaluation

Financial uncertainty can cause the strongest currency to lose value. While this currency can be printed ‘at will’, on the other hand, gold as a tangible asset cannot be reproduced by machine, so it is believed to be able to protect investors from currency devaluation.

  1. Gold can be an emergency fund

Fluctuations in the price of gold depend on the value of the national currency against foreign currencies, especially the US dollar. Although an increase in the price of gold can only happen every few years, the price of this precious metal tends to rise rather than fall. For this reason, investing in gold can provide benefits in the long term and can become an emergency fund in the future.

  1. Gold risk is relatively minimal

Choosing gold as an investment is the best solution for beginners, because apart from having various advantages, this investment also has minimal risk. Gold can be stored for a long time, it will not even experience a physical change.

However, investing in this precious metal requires a long time or at least a medium to get better results. So gold can’t be a short-term investment. For example, in 1997 the price of gold was IDR25 thousand per gram. If it were sold today, its value would increase drastically. Previously, 1 motorbike costing 5 million was equivalent to 200 grams of gold, now 200 grams of gold is equivalent to 12 motorbikes.

So, are you ready to invest in gold?


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