Recession Watch: Is gold really a safe hedge?

Recession Watch

Ole Hansen

Head of Commodity Strategy

Summary:  Gold, secure government bonds and some currencies, such as the US dollar, are often viewed as the go-to markets during a recession when capital preservation becomes more important than capital appreciation.


Applying hedges during periods of economic stagnation or decline can best be compared to taking out an insurance policy to offset, or more likely, to try and mitigate adverse market movements in riskier assets such as stocks, corporate credit and real estate.  

Hedging does not come without risks as the both the choice of product and timing of when the trade is entered will have a major impact on its potential success. 

A good hedge is finding an asset where correlations to other asset classes decreases during recessions. Studies have found that gold’s correlation with stocks breaks down during recessions. This means that historically, gold will often move in the opposite direction of stocks during periods of recession. However, the mere fact that the economy enters a recession doesn’t necessarily lift the price of gold. It also depends on the behaviour of other markets. 

However, in general one can say that during a recession interest rates typically go down while stocks are being hurt by a decline in earnings as consumers’ fear of losing their jobs prompts them to save money instead of spending it. While both are likely to provide support, the risk aversion associated with an economic slowdown may trigger a need from investors to reduce exposure across the board. On that basis, an already elevated speculative involvement by hedge funds could trigger selling of gold, purely from the need to reduce exposure. 

There have been seven recessions since 1965 and during these periods gold rose during five while only suffering a noticeable decline in one. 

Saxo Bank A/S - Representative Office
Boulevard Plaza - Tower 1
30th floor, office 3002
Dubai Downtown, Burj Khalifa area
Dubai
UAE

UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.