If you are a watcher of global markets, you’re likely aware that markets are concerned about a potential global slowdown. Should a recession happen in 2019 or 2020, what would it mean for the price of gold?
To address this, let’s inspect what the price of gold has done during the prior two recessions.
What is a recession?
Before looking at what the price of gold might do during a potential 2019 or 2020 recession, let’s define a recession. The following figure looks at the unemployment rate for the European Union (EU) since 2001. In the gray bars are the prior two recessions.
The first recession occurred between September 2001 and May 2004 (again, according to the EU unemployment rate). This recession is commonly known as the tech bubble. During this period, the EU unemployment rate increased from around 8.3% to 9.3%. If you compare how the unemployment rose during this period to what happened in the 2008 global financial crisis, this period looks relatively sanguine.
Let’s move on to the most recent recession. This covers the period from March 2008 to July 2013. Over this time, the EU unemployment rate went from a low of 7.3% to a high of 12.1%. Not a wonderful experience if you were a worker in the EU during this period.
Looking at the Connection Between the Unemployment Rate (Recession) and the Price of Gold
Now, let’s take a look at how the price of gold did during the past two recessions.
In Figure 2 are two lines. The first line, in brown, is the EU unemployment rate.
In yellow is the PM price of gold. This price corresponds with the left axis.
What happened with the price of gold during the past two recession?
During the 2002 recession, gold didn’t move a whole lot. The price floated in a narrow range of around €315 per troy ounce. The rise was not incredibly volatile, unlike most other historic price gains.
Fast forward to the 2008 recession and a different picture emerges. The price of gold shot up like a rocket. The price almost tripled, from around €575 per troy ounce to a high of €1,372.
A portion of this rise was because gold acts as a hedge against unwise fiscal and monetary policy.
Since the end of the global financial crisis, gold has given up some of its gains, but has since begun re-appreciating in recent months.
What’s the bottom line?
The answer depends, at least partly, on how the markets think governments will respond to a recession. Should governments opt for unwise policy, holders of gold will no doubt be heavy beneficiaries.