Why the price of gold almost always go down during recessions?

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When analyzing the historical price movements of gold, a recurring observation emerges—gold often experiences significant dips during recessions. The current scenario at Costco, selling gold at these rates, could suggest a potential economic downturn on the horizon. It’s a speculative correlation, but if Costco is already in possession of this gold, their selling it at a reduced price could indicate either they acquired it cheaply or are selling it without any markup. Considering Costco’s business model, which heavily relies on membership fees for profit, the notion that they might be offering gold bars at cost, or even below it, to drive memberships isn’t far-fetched. However, the volume of gold they move—about 50,000 ounces in a quarter—compared to renowned entities like PAMP, raises questions. PAMP acquires gold at spot prices from exchanges, so how can Costco procure the final product below spot, especially since it’s third-party mint products like PAMP bars they predominantly deal in?

5 Key Highlights:

  1. Gold and Recessions: Historical patterns suggest that gold often dips during recessions, but it’s a safe-haven asset, usually performing well in economic downturns.
  2. Costco’s Gold Sales: Costco’s selling of gold at reduced rates hints at potential economic changes; their volume may influence pricing due to their significant retail presence.
  3. Gold as a Safe-Haven Asset: During recessions, institutional investors typically shift towards safe-haven assets like gold and Treasuries, seeking stability.
  4. Costco’s Gold Procurement: Costco’s ability to offer competitive prices may stem from selling at procurement cost, potentially influencing market prices.
  5. Gold’s Role in Downturns: While stocks may seem appealing, gold’s zero yield makes it attractive during recessions due to its stability and low correlation with market fluctuations.

Summary:

The historical behavior of gold prices during recessions highlights a pattern where gold often experiences dips initially but tends to stabilize or appreciate as economic uncertainty increases. Costco’s reduced-rate gold sales suggest a potential economic downturn, possibly leveraging their substantial gold sales volume to influence market prices. Institutional investors often pivot to safe-haven assets like gold during recessions, amplifying demand. Costco’s pricing strategy may involve selling at procurement cost, influencing market rates. Gold’s appeal lies in its stability and low correlation with market fluctuations, making it an attractive asset during economic uncertainties, despite its zero yield compared to stocks. Overall, while gold might initially fluctuate, historical trends support its reliability as a hedge during recessionary periods.

It’s improbable that Costco taps into an underground exchange to buy below spot, raising valid queries about the mint’s revenue if they sell to Costco at a loss. The likeliest theory is that Costco sells gold at the same price they procure it, explaining their ability to offer competitive prices by passing through their dealer cost. Their substantial quarterly gold sales potentially grant them some pricing influence, given their significant retail presence in the US.

In consideration of market movements and personal financial caution, I refrain from overextending my purchases, aiming not only to avoid regret in the event of an economic downturn but also to retain the ability to buy during such times rather than sell. During recessions, the inclination to exit the stock market and flock towards gold and silver emerges. This movement is part of a larger strategy by institutional investors, who seek stability in assets like gold and real estate during market downturns. The demand for these safe-haven assets increases while equities and riskier credits decline. Institutions often face margin calls during market drops, leading to selling off stable positions and retaining depreciated assets, causing distortions in safety assets. Thus, the potential recession might indeed present a favorable window for entering the gold market due to its historical performance as a safe-haven asset during economic downturns.

Gold’s zero yield might make stocks seem more appealing during stable market conditions. However, during recessions when many companies yield negative returns, gold’s zero yield becomes comparatively more attractive. The fear of losing money rapidly in businesses facing losses drives investors towards gold, which retains its value even when stocks perform poorly.

Additionally, the risks associated with counterparties during recessions become prominent. Stock exchanges and brokers, susceptible to defaults in a recessionary environment, heighten the counterparty risk. Owning assets dependent on other entities’ obligations poses a risk of default, leading some investors to prefer owning tangible assets like gold to avoid being affected by others’ defaults during economic downturns.

Historical examples of gold prices going down during a recession: The historical data and expert opinions suggest that gold prices generally do not go down during recessions. Gold is considered a safe-haven asset, and its demand typically increases during economic downturns as investors seek to diversify their portfolios and hedge against economic uncertainty. Historical data from the U.S. Bureau of Labor Statistics, Visual Capitalist, Schroders, and other sources indicate that gold tends to perform well during recessions, with its price either remaining stable or experiencing an upswing. For example, in six of the last eight recessions, gold outperformed the S&P 500 by 37% on average. Therefore, while the price of gold is influenced by various factors, it is generally seen as a valuable commodity during recessions due to its liquidity and the security it offers to investors.

How does the price of gold compare to other assets during a recession: Gold is often considered a safe-haven asset, and historical data and expert opinions suggest that it tends to perform well during recessions. The price of gold typically remains stable or even experiences an upswing during economic downturns. For example, looking at the returns from six months prior to the start of the recession to six months after, gold has returned 28% on average and outperformed the S&P 500 by 37%. Gold’s value comes from its scarcity as a precious metal and its low-to-negative correlation with the stock market, making it an effective diversification tool for investors who want to hedge their bets. Additionally, gold equities have historically done even better during recessions, outperforming the S&P 500 by a significant margin. Therefore, gold is often seen as a valuable commodity during recessions due to its liquidity and the security it offers to investors. While the price of gold is influenced by various factors, it is generally considered a good investment during recessionary periods.

What is the historical trend of gold prices during a recession: The historical trend of gold prices during a recession indicates that gold has generally performed well during economic downturns. Since 1971, when the gold standard was abandoned, gold has largely seen positive price changes during recessions. Data from Macrotrends highlights gold’s price movements during recessions, showing that its performance has countered that of the S&P 500 in the last three recessions since 2000. For example, during the 2007 recession, gold’s price increased by 16.3% while the S&P 500 decreased by 37.4%. Similarly, looking at the returns from six months prior to the start of the recession to six months after, gold has returned 28% on average and outperformed the S&P 500 by 37%. Gold’s value as a safe-haven asset, its low-to-negative correlation with the stock market, and its ability to provide stability and potential growth during economic downturns have contributed to its favorable performance during recessions. Therefore, the historical trend suggests that gold prices have remained stable or even experienced an upswing during recessionary periods, making gold a valuable commodity for investors seeking to hedge against economic uncertainty.

What is the relationship between gold prices and inflation during a recession: Gold prices and inflation during a recession have an interesting relationship. While gold is traditionally considered an inflation hedge, it also tends to perform well during recessions. The demand for gold increases during economic downturns as investors seek safe-haven assets to hedge against economic uncertainty. This increased demand can lead to a rise in the price of gold, making it a valuable commodity during recessionary periods. Historical data and expert opinions suggest that gold has generally seen positive price changes during recessions, with its performance countering that of the S&P 500 in many cases. Therefore, while gold is an inflation hedge, its performance during recessions indicates that it is less affected by economic downturns than many other commodities, and it tends to perform well as a safe-haven asset during these periods

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