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Gold Behaviour and Recession

Gold a stable medium of exchange has been traditionally considered a safe-haven asset, with many investors turning to the yellow metal during recessions and times of uncertain and volatile economic conditions.

Gold also has a low-to-negative correlation with the stock market, suggesting that changes in the price of gold are largely independent of how stocks are faring. As a result, gold is considered an effective diversification tool for investors who want to hedge their bets and prefer investing in assets rather than sitting on a large chunk of cash.

Since 1971, when the gold standard was abandoned, gold has largely seen positive price changes during recessions. And in the last three recessions since 2000, its performance has countered that of Nifty50. While the value increases haven’t been dramatic, they help cement gold’s position as a hedge against financial turmoil and as a store of value.

For example, when the stock market collapsed in 2007, investment demand for gold increased as investors looked for a safer option. Between 2007 and 2011, gold’s price more than doubled. Similarly, with fear and uncertainty at a high during the COVID-19 pandemic, gold-backed exchange-traded funds saw record inflows, and the price of gold reached an all-time high.

However, while gold’s price tends to rise during times of economic turmoil, it often stagnates or falls when the economy is healthy and investors seek riskier investments. As a result, investors need to consider the overall macroeconomic and geopolitical environment when looking at gold and balance their portfolio according to the overall economic condition.

The global economy has been shaking with turbulence in 2022, on the back of supply-side consumer inflation and Russia Ukraine War and hence we are witnessing dismal stock market returns.

With gold prices down 2% year to date FY22 could be a good time to diversify your portfolio and invest in a stable and safe investment avenue like Gold. Indian Investors can invest in Gold both physically and via Gold ETF from leading AMCs. ICICI Prudential Gold ETF and Axis Gold ETF are some of the popular gold ETFs investors can watch for.