Should you buy gold in response to the rising probability of a recession?

Gold trades close to its all-time high levels and, for once since the COVID-19 pandemic, acts as a hedge against inflation. Many investors bought gold when governments and central banks started pumping money into the financial system in response to the pandemic shock.

Even legendary investor Warren Buffett bought shares in a gold company.

Indeed, fears of high inflation materialized. But the higher inflation went, the more the gold price dived.

It was surprising, therefore, to see investors fleeing gold in search of alternatives, such as Bitcoin, dubbed the “digital gold”, the true inflation hedge of our era. Yet, as it turned out, gold price was only consolidating before a new attempt to all-time high levels.

Now that inflation appears to have peaked, gold rallies. Moreover, while regional banks in the United States struggle, losing a third of their value this year, gold producers’ stock prices surged. Investors, therefore, turned to gold again, but the question is – what comes next?

Given the rising probability of a recession, gold seems like a good investment.

The probability of a recession is rising

The Federal Reserve of the United States reacted to rising inflation by tightening the monetary policy. It did it so fast that there is a risk of a recession – and the Fed knows it.

But the Fed’s mandate, which includes job creation and price stability, has nothing to do with avoiding recessions. Sometimes, recessions are necessary, as the economy may overheat.

According to the Recession Probability Composite Index, the chances of a recession are high and rising. So what does it mean for gold?

How did gold perform in previous recessions?

Gold outperforms during economic recessions. Between 1973 and 1975, the US economy was in a 16-month-long recession. The S&P 500 index lost over -20% of its value, while US Treasury Index gained +10.1%. What did gold do? It gained +81.6%.

In 1980, a 6-month-long recession led to gold gaining +27.6%. Moreover, during the most recent economic recession, between 2007-2009, gold gained +25% while the S&P 500 tanked -35.6%.

Triple tops rarely hold

The technical picture also supports higher gold prices. Gold failed in the same area as in 2020 and 2022, raising fears of a triple top pattern.

Gold chart by TradingView

Triple tops are reversal patterns, but technical traders know that they rarely hold in the long term. Even if the market retraces from the current levels, it usually only does so to “build energy” to break the horizontal resistance.

All in all, gold looks bullish in this context. Bulls will likely buy any dips.

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