This post was written with contributions from the SPDR Gold Strategy Team: George Milling-Stanley, Chief Gold Strategist, and Diego Andrade, Senior Gold Strategist.
With GDP posting a record low of -31.7% for Q2 2020,1 the United States officially entered its first economic recession in over a decade. Gold is popularly associated with providing a potential hedge during economic downturns, so it’s not much of a surprise that it has risen 27% year to date and is on track to have its best year since 2010.2 Given continued uncertainty during this current recession, it may pay to not only focus on gold’s historical track record during these phases, but also to evaluate the key drivers supporting gold’s current outlook,3 which remain strong – even against the potential for a US economic recovery.
Gold Leads in the Recession Procession
The investing merit of gold during recessions is a common association, and as Figure 1 highlights, this is well earned. Since 1971, when gold began freely trading in the post-Bretton Woods era, the US has experienced seven economic recessions. During these periods, gold averaged a 20.19% return, which has led the way compared with other major US assets – including US stocks, Treasury bonds, corporate bonds, and the US dollar. Additionally, gold managed to provide positive returns and outperform broad commodities in all but one of those periods (1990-1991).
A Snapshot of Gold’s Historical Bouts with Recessions
A concern that’s been raised during this current US recession is gold’s rising correlation with US equities. However, this is not surprising – and it is actually in line with its historical performance. Since 1973, gold’s correlation with the S&P 500 Index has averaged -0.03. During recessions, this correlation has increased to 0.08, on average, with five out of the seven recessions being measured exhibiting clearly rising correlations (see Figure 2). This rise in correlation is likely driven by several coinciding factors that are affecting investor behaviors in a manner that is supportive of both gold and equities.
An economic recession is typically preceded by a market downturn, in which generally deep-value opportunities in stocks emerge. Simultaneously, investor behavior also tends to shift defensively, which has generally aided gold investment demand alongside bonds. Additionally, during recessions, central banks have tended to lower policy interest rates – which, coupled with a reduction in risk appetite, puts further pressure on bond yields. If history is any guide, this low-yield environment may present an accommodative backdrop for gold to perform well.
Gold’s behavior during recessions is fairly clear, and in favor of the yellow metal. Looking at gold’s performance during other cyclical phases shows that, on average, gold also fares well outside of recessions. Turning from lagging indicators — such as GDP — to leading economic indicators4 shows that gold’s average monthly return is positive during all four phases of a full cycle (see Figure 3). On an average monthly basis, gold has done its best during periods of recession and slowdown — outperforming equities, Treasury bonds, and the US dollar. During periods of US recovery and expansion, gold has shown positive returns, while keeping pace with other defensive portfolio assets, such as Treasury bonds and the US dollar.
On the Road to Recovery
As the US economy continues on its path toward recovery, gold has the potential to remain strong and provide investors a vital tool for managing portfolios through ongoing uncertainty. The key catalysts that drove gold following the most recent recession in 2007–2009 are very similar to today’s backdrop: risk-off sentiment on the heels of economic slowdown, low real interest rates globally, and concerns about building inflationary pressures in response to fiscal and monetary stimulus. Continued tailwinds from a weaker US dollar outlook5 could also benefit gold, given the metal’s negative historical correlation to the greenback. These factors, along with fundamentals – as opposed to solely in which phase the economy resides – should be the focus for gold’s outlook.
Furthermore, gold may continue higher based on its performance starting at equity market bottoms during recessionary periods. Between the period of the S&P 500 bottoming after the 2007-2009 recession and gold reaching its prior all-time high in 2011 (3/9/09 – 9/6/11), the cumulative gold return was 106% over that two-and-a-half-year period. See Figure 4 below. Comparing this with gold’s performance to date — since the S&P 500 bottomed on March 23, 2020 in response to the current recession — paints a stark contrast, with the gold price rising only 24% since this market trough. See Figure 4. While this does not guarantee that gold will see the same level of performance as last time, it does, however, show that gold has the capacity to continue performing well over the medium to longer term – even as the US economy begins to recover and expand.
Furthermore, with the potential for volatility heading into year-end, coupled with rising geopolitical risks during a US election year, gold’s historical track record of hedging against significant equity drawdowns is a key example of its potential portfolio diversification benefits (see Figure 5). This may aid portfolios in an environment of continued uncertainty through the remainder of 2020 and into 2021.
1 Bloomberg Finance L.P, Bureau of Economic Analysis. Data as of 6/30/2020.
2 Bloomberg Finance L.P., State Street Global Advisors. Year-to-date return as of 8/27/2020. Gold price return was 29.6% in 2010.
4 As measured by Conference Board LEI Index. Four phases of business cycle (recession, recovery, expansion, slowdown) were measured based on the direction and magnitude of changes of the Conference Board Leading Economic Indicator (LEI) Index. Recession: LEI Index declines to a trough at an accelerating pace; Recovery: LEI Index rebounds from a trough but below long-term trends; Expansion: LEI Index YoY changes are positive and above long-term trends; Slowdown: LEI Index YoY changes pass the peak and begin moderating.
Bloomberg Barclays US Corporate Bond Index
The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market.
Bloomberg Barclays US Treasury Index
The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
Bretton Woods Agreement
An agreement in 1944 that established a gold exchange standard for Western European nations and Japan once World War II was over. Under the pact, respective currencies were pegged to the US dollar and central banks could exchange dollar holdings into gold at the official exchange rate of $35 per ounce. In 1971, US President Richard Nixon terminated convertibility of the US dollar into gold, which marked the beginning of the floating fiat currency structure that remains in place today. The agreement is so named because it was negotiated in Bretton Woods, New Hampshire.
Gross Domestic Product or GDP
The monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
Leading Economic Indicators (LEI)
Leading indicators include economic variables that tend to move before changes in the overall economy. These indicators give a sense of the future state of an economy.
A contraction in economic activity as profits decline and consumer expectations begin to bottom out that typically leads to accommodative monetary policy. Recessions have been characterized as at least two consecutive quarters of economic contraction, but definitions vary, and the concept is subjective.
S&P GSCI Total Return Index
The S&P GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Index is calculated primarily on a world production weighted basis comprised of the principal physical commodities futures contracts.
S&P 500 Total Return Index
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
US Dollar Index
The US Dollar Index (DXY) measures the performance of the US Dollar against a basket of currencies: the euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP), the Canadian dollar (CAD), the Swiss Franc (CHF) and the Swedish krona (SEK).
Marketing Communication for Professional Investors Only
For SPDR® Gold Trust and SPDR® Gold MiniSharesSM Trust:
Investing involves risk, and you could lose money on an investment in each of SPDR® Gold Shares Trust (“GLD®”) and SPDR® Gold MiniSharesSM Trust (“GLDMSM”), a series of the World Gold Trust (together, the “Funds”).
Commodities and commodity-index linked securities may be affected by changes in overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes, or political and regulatory developments, as well as trading activity of speculators and arbitrageurs in the underlying commodities.
Investing in commodities entails significant risk and is not appropriate for all investors.
Important Information Relating to SPDR® Gold Trust (“GLD®”) and SPDR® Gold MiniSharesSM Trust (“GLDMSM”):
The SPDR Gold Trust (“GLD”) and the World Gold Trust have each filed a registration statement (including a prospectus) with the Securities and Exchange Commission (“SEC”) for GLD and GLDM, respectively. Before you invest, you should read the prospectus in the registration statement and other documents each Fund has filed with the SEC for more complete information about each Fund and these offerings. Please see each Fund’s prospectus for a detailed discussion of the risks of investing in each Fund’s shares. The GLD prospectus is available by clicking here and the GLDM prospectus is available by clicking here. You may get these documents for free by visiting EDGAR on the SEC website at sec.gov or by visiting spdrgoldshares.com. Alternatively, the Funds or any authorized participant will arrange to send you the prospectus if you request it by calling +41 44 245 70 00.
None of the Funds is an investment company registered under the Investment Company Act of 1940 (the “1940 Act”). As a result, shareholders of each Fund do not have the protections associated with ownership of shares in an investment company registered under the 1940 Act. GLD and GLDM are not subject to regulation under the Commodity Exchange Act of 1936 (the “CEA”). As a result, shareholders of each of GLD and GLDM do not have the protections afforded by the CEA.
Shares of each Fund trade like stocks, are subject to investment risk and will fluctuate in market value.
The values of GLD shares and GLDM shares relate directly to the value of the gold held by each Fund (less its expenses), respectively. Fluctuations in the price of gold could materially and adversely affect an investment in the shares. The price received upon the sale of the shares, which trade at market price, may be more or less than the value of the gold represented by them.
None of the Funds generate any income, and as each Fund regularly sells gold to pay for its ongoing expenses, the amount of gold represented by each Fund share will decline over time to that extent.
The World Gold Council name and logo are a registered trademark and used with the permission of the World Gold Council pursuant to a license agreement. The World Gold Council is not responsible for the content of, and is not liable for the use of or reliance on, this material. World Gold Council is an affiliate of the Sponsor of each of GLD and GLDM.
GLD® is a registered trademark of World Gold Trust Services, LLC used with the permission of World Gold Trust Services, LLC. MiniSharesSM and GLDMSM are service marks of WGC USA Asset Management Company, LLC used with the permission of WGC USA Asset Management Company, LLC.
The Trust has not been approved by the Swiss Financial Market Supervisory Authority FINMA ("FINMA") as a foreign collective investment scheme which may be offered to non-qualified investors pursuant to Article 120 of the Swiss Collective Investment Schemes Act ("CISA"). Accordingly, the Shares may only be offered, sold or otherwise made available in Switzerland to qualified investors, as defined Article 10(3) and (3ter) of the Swiss Collective Investment Schemes Act (“CISA”) and its implementing ordinance, at the exclusion of qualified investors with an opting-out pursuant to Art. 5(1) of the Swiss Federal Law on Financial Services ("FinSA") and without any portfolio management or advisory relationship with a financial intermediary pursuant to Article 10(3ter) CISA (“Excluded Qualified Investors”). Before investing please read the Trust’s Prospectus, Trust Indenture and annual financial statements. Prospective investors may obtain these documents free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstrasse 19, 8027 Zurich, as well as from the main distributor in Switzerland, State Street Global Advisors AG (“SSGA AG”), Beethovenstrasse 19, 8027 Zurich. For Shares offered, sold or otherwise made available in Switzerland, the registered office of the Swiss Representative is the place of jurisdiction and performance. The Trust or its delegates do not pay retrocessions to third parties as compensation for the offer of Shares in Switzerland.
This is a Marketing Communication
Investing involves risk including the risk of loss of principal.
Commodity funds may be subject to greater volatility than investments in traditional securities. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors, such as weather, disease, embargoes, and international economic and political developments.
This material is for your private information. The views expressed are the views the SPDR® Gold Strategy Team and are subject to change based on market and other conditions. The opinions expressed may differ from those with different investment philosophies.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor's or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research; and (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
This document has been issued by State Street Global Advisors Ireland (“SSGA”), regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. Fax: +353 (0)1 776 3300. Web: www.ssga.com.
SPDR ETFs is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.
SSGA SPDR ETFs Europe I & SPDR ETFs Europe II plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organized as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorized as a UCITS by the Central Bank of Ireland.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind.
© 2021 State Street Corporation - All Rights Reserved.