Updated on 02/07/17
When the economy skids into a recession, most investors end up riding shotgun right along with it. And that means big losses for stock portfolios.
Cycling through ups and downs, the economy overheats, growth then slows, which impacts company earnings and pushes stocks down.
An allocation to bonds hardly makes up for equity losses at current interest rates. The net result is that most investment portfolios will decline in value.
So do we just have to accept that our personal net worth will fall in the next economic collapse?
The answer lies in the correlation of your assets…
(Start your allocation to gold today. Download Investing in Precious Metals 101 to learn the best bullion to buy and how gold can protect you against all kinds of crises.)
When growth slows, so do most revenues, real estate prices, and demand for commodities. As a result, nearly all assets lose value.
The way to lessen—or even eliminate—a fall in portfolio value during an economic collapse is to understand asset correlation. You want to own assets that tend to move opposite of most other investments.
Finding uncorrelated investments is not easy. You can count them on one hand. Some bonds do well, but certainly not all of them. Dividends will help, but they can’t make up for a big fall in the markets.
Gold, however, is largely uncorrelated to stocks and many other investments. And here’s an interesting fact the World Gold Council uncovered:
➢ Gold’s correlation to stocks drops during a recession.
This is a good thing since most stocks fall.
Notice what happens to gold’s correlation to other asset classes when the economy moves from economic expansion to contraction (data from 1987 through 2015)…
(A “1” correlation means assets always move in the same direction; “0” means they move together 50% of the time; and “-1” means they never move together.)
Gold already has a negative correlation to the S&P during periods of growth. In an economic collapse, the correlation grows even more negative.
This means that historically, gold will more often than not move in the opposite direction of stocks during periods of recession. And since stocks typically decline, gold is likely to rise.
Here’s proof. There have been seven recessions since 1965. Notice how gold has performed.
In five of the seven recessions, the gold price rose. And three of those times it soared double digits. In only one recession did gold suffer a noticeable decline (-9.1% in 1990). Even in the midst of the economic collapse of 2008–2009, gold moved higher.
This makes sense when you think about it. A slowing economy stokes investor worry, and gold is a natural refuge in times of economic stress.
This has clear implications for investors. To preserve the value of your investment portfolio…
➢ Own a meaningful amount of gold before the next recession begins.
As the saying goes, you can’t buy flood insurance after the flood. You must buy it before trouble strikes.
So, is the next crisis on the horizon?
Recessions carry all sorts of social quirks. They are the stuff of bad conversation. They create widespread job insecurity as layoffs hit the economy. Who wants to talk about possibly losing their job?
Worse, no one really wants to stick their neck out and say one is coming. Talk of economic collapse in the popular media could itself cause stocks to sell off, undermine analyst’s recommendations, and force politicians to admit their policies aren’t working.
There’s just no benefit in recession forecasting. If you’re right, you get blamed for bringing it on. If you’re wrong, you break an egg on your reputation. Predicting an economic collapse can be like guessing next week’s weather, so why bother.
Several recent studies confirm this. Here are a few of them…
➢ In a multi-country study of private-sector forecasts from 1989 to 1998, IMF researcher Prakash Loungani found that “the record of failure to predict recessions is virtually unblemished.”
➢ An update to the 2014 study “Fail Again? Fail Better? Forecasts by Economists During the Great Recession” found that the “private-sector’s record of failure to predict recessions remained intact through 2008 and 2009.”
➢ Another 2014 study found that one-year-advance growth forecasts from the Federal Reserve Bank of New York and the European Central Bank from 2008 to 2012 showed “substantial over-optimism, averaging 1.6 to 2.4 percentage points above actual growth.”
Meanwhile, the Bank for International Settlements (BIS) expressed concern about the next recession, stating that “recessions triggered by financial crises are typically preceded by sustained episodes of bubbly asset prices and debt-financed spending booms.”
Do we have bubbly asset prices? Have we experienced a debt-financed spending boom? The BIS thinks so—which means the next recession may not only be close, but could be bigger than usual and come with a difficult recovery.
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Knowing that gold is not correlated to the stock market—and that stocks usually fall in a recession—and that another recession will happen, it makes sense to buy gold now.
No prediction about future events or getting the timing right is required.
You don’t buy homeowner’s insurance based on a prediction of when your house could burn down. You buy the insurance to limit your financial loss in case your house burns down.
Regarding an economic collapse, there is no “in case”…
➢ The odds of another recession are 100%.
History clearly shows this. Another recession is inescapable.
This makes gold an absolute portfolio necessity. I know many gold critics that own gold because of this exact argument.
We don't have to predict the future in detail to justify buying gold. We are simply shielding the rest of our portfolio from the strong likelihood of losses.
Those who own a meaningful amount of gold stand a greater chance of winning in the next recession than those who do not.
Don’t wait until the next recession reveals itself to complete your bullion holdings. You can buy gold today and pay one of the lowest premiums in the industry through the Hard Assets Alliance (HAA). You can even store it internationally at any of the six world-class vault locations. Get started now.
Download Investing in Precious Metals 101 for everything you need to know before buying gold and silver. Learn how to make asset correlation work for you, how to buy metal (plus how much you need), and which type of gold makes for the safest investment. You’ll also get tips for finding a dealer you can trust and discover what professional storage offers that the banking system can’t. It’s the definitive guide for investors new to the precious metals market. Get it now.
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