How does gold perform during recessions?

Gold has historically risen during recessions. In some cases the gains were substantial, and the only two declines were single digits. Interest Rates. How much more can the Fed realistically raise rates? It’s a fair question, because between the aggressive rate hikes and surging debt levels, payments on federal debt are now at record highs.

This is the steepest rise in history. It’s a path that is clearly unsustainable. Further, will the Fed continue to hike rates if the public and investors begin to grumble if we enter a recession and stock markets continue to fall? And here’s something you may find surprising… since the 1950s, the average time from the last rate hike to the first rate cut is just five months!

This suggests that if the Fed ends rate hikes in 2023, it is entirely plausible it could begin cutting them before the year is over. This would be very bullish for gold. U.S. Dollar. One of the factors that kept gold from rising in 2022 was the soaring U.S. dollar, since gold and the dollar are typically inversely correlated. Does the dollar cool off in 2023? It wouldn’t be surprising to see a pullback, given the extent of the gain last year. If so, one of gold’s biggest barriers will be removed. Vulnerable Stock Markets. The S&P 500 fell 19.4% in 2022, while the Nasdaq crashed 33.1%. After that shellacking, one could easily be convinced that stocks will bounce. But if inflation persists, rate hikes continue, and a recession materializes, equities will face several strong headwinds. This table shows gold’s performance during the 10 biggest crashes in the S&P 500. Green means gold rose during the crash, red means it fell more than stocks, yellow means it fell but less than stocks.

Gold is historically inversely correlated to stocks, an ideal hedge to weak markets. If we see further stock market weakness or a crash in 2023, gold is likely to rise. Resumption of QE? The Financial Times says the cycle of global liquidity is bottoming out. “Quantitative easing programs by central banks to support markets are impossible to reverse quickly because the financial sector has become so dependent on easy liquidity.” It’s a fair point, since…

● The very act of quantitative tightening creates systemic risks that demand more QE.

A resumption of QE is exactly what money manager Marc Faber said he expects in 2023. Meanwhile, President Biden signed a $1.66 trillion bill funding the U.S. government for the fiscal year 2023. The budget remains deep in deficit. Central Banks. Central bank buying lends support to the price. This may explain why gold didn’t fall in 2022. As a group, central banks bought more gold through Q3 last year than any year since 1967, ironically when the U.S. was on a gold exchange standard. According to the World Gold Council, demand was “primarily driven by a flight towards safer assets.” China, for the first time in three years, bought more gold for its official Reserves. It purchased 32 tonnes in November, it's total is now at 1,980 tonnes. Cleary, the world’s central banks see something that compels them to make an overweight allocation to gold at this time. Gold’s Technical Picture. A number of chartists have pointed out that gold has a strong technical setup. Here’s what Silver Chartist says in their chart below: “Last month gold staged a clean breakout above the 2022 red downtrend line, suggesting a major trend reversal is underway. Of course, nothing moves in a straight line, but higher highs and higher lows are expected and gold’s prospects for 2023 look bright.”

While the precise timing of an up-move is hard to pinpoint, it suggests a surge is coming in 2023. [I would have an overexposure of 10% in Gold with a purchase every time rates are raised or left untouched]