The reasons why I believe investors should avoid gold in a recession

Bryan Williams outlines the reasons why he agrees with Warren Buffett on the subject of gold.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In recent months there has been a steady drum beat of negative news about the world economy. As the litany of concerns grows ever longer, many investors are casting their eyes towards gold ETFs such as ETFS Metal Securities Ltd Physical Gold in the belief that the precious metal may afford some protection.

It is my contention that faith in gold is generally misplaced. Having said that, investors who choose to put their trust in gold are in good company. One of the most successful hedge fund managers, Ray Dalio of Bridgewater Associates, maintains around 10% of his flagship fund invested in gold, citing political and inflationary risks.

In contrast, the most famous investor of them all, Warren Buffett, has frequently voiced his disdain for gold. He counsels investors to keep calm and take a long-term view. He insists that while it is tempting to sell when markets are falling, it is better not to give in to the collywobbles.

The gold story

Beginning with the severe contraction that occurred between 1980 and 1982. This recession was exacerbated by central banks revving up interest rates in order to crush inflation. As expected, the price of gold rose in lock step with inflation and soared from around $200 an ounce in 1979 to reach a peak of around $650 an ounce in 1980. However, during the depths of this slump, the price fell back to about $400 an ounce.

Subsequent to periods of economic growth, there were bear markets in 1990 and 2001, neither of which were noted for raised inflation. Conspicuously, the price of gold barely budged during these downturns.

Many investors remember the rocketing price of gold leading up to the financial meltdown that started in 2007. During those dark days there was talk of a collapse of the banking system and bond defaults. Also, Investors in national bonds faced the real prospect of haircuts on their principal. At that time, the price of gold surged from about $300 an ounce in 2002 to almost $2,000 an ounce 10 years later.

In summary, recent history confirms the hypothesis that gold does rise during periods of inflation and extreme uncertainty. Whilst this is true, history also shows that in the absence of these two factors, gold offers little benefit.

In the long term?

Here, the evidence is unequivocal. Since its inception in 1984, the FTSE 100 has risen around 620% whilst gold has gone up by a fraction of this over the same time frame. If the highest price ever reached for gold is used, then we get to about a 400% rise. Of course, if dividend gains were included for the FTSE 100, the gulf between the two would be considerably greater.

How things look at the moment

Right now, rather than an inflationary environment, there is talk of deflation, which does not bode well for gold. Yes, there is currently a lot of friction on trade issues, but it’s my belief that the present impasse will soon be resolved and these matters will fade into memory. For concerned investors there are some stocks that may offer a measure of reassurance.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bryan Williams has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »